Jeff Nielson's Instablog Jeff Nielson is from Canada and is a writer/editor for Bullion Bulls Canada (http://www.bullionbullscanada.com/#content). He has a personal background in law and economics. Bullion Bulls Canada provides general macro-economic and political commentary, since the precious metals markets are among the most complex (and misunderstood) in the world. It also provides basic coverage of Canadian precious metals mining companies. Canada is the global leader in mining exploration, and Canadian-listed mining companies (on the Toronto Stock Exchange and Venture Exchange) are responsible for the majority of the world's most-promising discoveries. Jeff Nielson http://seekingalpha.com Treasury Department Stalls Budget Report http://seekingalpha.com/instablog/407380-jeff-nielson/38260-treasury-department-stalls-budget-report?source=feed 38260 The U.S. Treasury Department recently announced that it's normal, annual calculation of the U.S. deficit will be delayed by more than two months – and not released until February of next year. However, you will not read about this in any mainstream media outlet.

 

The reason for this omission? The mainstream media refuse to even report this deficit calculation, itself. As for why the media intentionally ignore this once-a-year calculation of the deficit, it's because this calculation is made without any of the lies and half-truths which are contained in the “official” deficit which the media does report. This calculation is conducted using the same GAAP accounting rules (Generally Accepted Accounting Principles) which all U.S. corporations are required to adhere to, by law.

 

Using legitimate accounting methods, U.S. deficits (calculated by the Treasury Department) have been averaging over $4 TRILLION per year throughout this entire decade – including all the bubble-years, when the U.S. economy was supposedly prospering. However, with government revenues collapsing, those “good times” of only $4 trillion/year deficits are now behind the U.S.

 

Last year, the Treasury Department calculated the official, GAAP annual deficit at $5.1 trillion. Obviously with spending way up, and revenues way down, the number for this year will be much higher. John Williams, the unofficial source for U.S. statistics at shadowstats.com (for those people who have no use for government propaganda) is expecting this year's calculation for the 2009 fiscal year to approach $9 trillion.

 

Keep in mind that in the fantasy-world of White House accounting that the Obama regime is “predicting” a total deficit of $9 trillion over the entire, next decade. The reason why the “official” deficit numbers are so radically different from the real budget numbers for the United States is that with GAAP accounting, the government is not allowed to hide its “unfunded liabilities” off of its balance sheet.

 

Follow the 'logic' here. The U.S. government knows it must radically slash all healthcare entitlement programs, or the U.S. is certain to go bankrupt some time over the next decade. However, the politicians can't cut spending because it would be too politically unpopular. The reason why such benefit cuts would be so unpopular is because the government engages in these enormous lies that the U.S. economy is not facing imminent bankruptcy.

 

And so this merry-go-round of cowardice and deceit continues. Not only are U.S. politicians afraid of doing the right thing when it comes to the U.S.'s out-of-control spending, but they are afraid to even tell the American people anything remotely close to the truth when it comes to government finances. During the Bush years, the fantasy-deficits reported by that regime totaled as little as 5% of the real deficit.

 

As I have also mentioned on several occasions, the U.S.'s two-party dictatorship conspires among themselves to hide this information. Don't you think the Democrats could have scored enormous “political points” by pointing out that the official, Bush deficit numbers drastically understated the real deficits?

 

Now that the Democrats hold the White House, don't expect the Republicans to violate this conspiracy of silence and tell the truth about U.S. deficits, either. When the Treasury Department does finally release this data (after the voting takes place on the expensive, Obama health-care bill), whether it reports an $8 trillion or $9 trillion deficit, don't expect the Republicans to expose these lies.

 

The countdown to U.S. bankruptcy is rapidly ticking away – and the American people have no clue about what is really taking place with the finances of their own government. The Orwellian, two-party dictatorship which mis-governs the United States can agree on very little, but the one area where they do achieve perfect consensus is in hiding the truth from the American public.

 

Obviously, the puny $11-trillion U.S. economy can not survive $9 trillion annual deficits for more than a few years before this hopelessly insolvent nation implodes on its debts – in at least as devastating a collapse as what took place in the former Soviet Union. The only 'escape' from this fate is to hyperinflate-away these incomprehensibly huge debts. However, all that such hyperinflation will accomplish is to create an even more horrific collapse a few years later.

 

This matters little to U.S. politicians. No matter how bad things become in the U.S., elected politicians (and their families) will never go hungry. Thus, all that matters to these corrupt opportunists is to get re-elected. Hiding the truth will remain the highest priority of the U.S. political system. When the Treasury Department releases its once-a-year report on the true condition of the U.S. economy (something it only does because it is mandated by law), every U.S. politician will ignore this report, and no mainstream U.S. media outlet will report it (other than in tiny print, buried beneath all other news).

 

There are no “miracle” solutions here. The chance to salvage the U.S. economy – intact – has already passed, years ago. The least-worst option for the American people is to face their national default/debt implosion now – as each year of delaying this only makes the final collapse that much more devastating when it finally takes place.

 

None of the $10 trillion in loans/hand-outs/guarantees to Wall Street should have been wasted on the oligarchs, as every penny of that money is needed to lessen the pain of total economic collapse for the American people. This would be completely obvious to everyone if U.S. politicians and the U.S. propaganda-machine stopped hiding imminent, financial Armageddon from the American people.

 

What is truly astounding, at this point, is how and why foreign creditors have failed to notice the true state of U.S. finances. Unlike the convoluted fiction of the U.S. “official” deficit, this GAAP accounting of the true state of U.S. finances is crystal-clear: the U.S. economy is hopelessly insolvent.

 

On the day that the true state of the U.S. economy finally becomes common knowledge, Americans can also expect to be totally cut-off from all foreign credit – unless and until the U.S. formally defaults. This is another reason why hyperinflation is 100% inevitable, if the U.S. continues to delay its debt-default.

 

The propagandists are unable to twist numbers as clear (and as huge) as the real U.S. deficit – and so they simply refuse to report it.



Disclosure: none]]> Thu, 03 Dec 2009 13:06:55 -0500 The U.S. Treasury Department recently announced that it's normal, annual calculation of the U.S. deficit will be delayed by more than two months – and not released until February of next year. However, you will not read about this in any mainstream media outlet.

 

The reason for this omission? The mainstream media refuse to even report this deficit calculation, itself. As for why the media intentionally ignore this once-a-year calculation of the deficit, it's because this calculation is made without any of the lies and half-truths which are contained in the “official” deficit which the media does report. This calculation is conducted using the same GAAP accounting rules (Generally Accepted Accounting Principles) which all U.S. corporations are required to adhere to, by law.

 

Using legitimate accounting methods, U.S. deficits (calculated by the Treasury Department) have been averaging over $4 TRILLION per year throughout this entire decade – including all the bubble-years, when the U.S. economy was supposedly prospering. However, with government revenues collapsing, those “good times” of only $4 trillion/year deficits are now behind the U.S.

 

Last year, the Treasury Department calculated the official, GAAP annual deficit at $5.1 trillion. Obviously with spending way up, and revenues way down, the number for this year will be much higher. John Williams, the unofficial source for U.S. statistics at shadowstats.com (for those people who have no use for government propaganda) is expecting this year's calculation for the 2009 fiscal year to approach $9 trillion.

 

Keep in mind that in the fantasy-world of White House accounting that the Obama regime is “predicting” a total deficit of $9 trillion over the entire, next decade. The reason why the “official” deficit numbers are so radically different from the real budget numbers for the United States is that with GAAP accounting, the government is not allowed to hide its “unfunded liabilities” off of its balance sheet.

 

Follow the 'logic' here. The U.S. government knows it must radically slash all healthcare entitlement programs, or the U.S. is certain to go bankrupt some time over the next decade. However, the politicians can't cut spending because it would be too politically unpopular. The reason why such benefit cuts would be so unpopular is because the government engages in these enormous lies that the U.S. economy is not facing imminent bankruptcy.

 

And so this merry-go-round of cowardice and deceit continues. Not only are U.S. politicians afraid of doing the right thing when it comes to the U.S.'s out-of-control spending, but they are afraid to even tell the American people anything remotely close to the truth when it comes to government finances. During the Bush years, the fantasy-deficits reported by that regime totaled as little as 5% of the real deficit.

 

As I have also mentioned on several occasions, the U.S.'s two-party dictatorship conspires among themselves to hide this information. Don't you think the Democrats could have scored enormous “political points” by pointing out that the official, Bush deficit numbers drastically understated the real deficits?

 

Now that the Democrats hold the White House, don't expect the Republicans to violate this conspiracy of silence and tell the truth about U.S. deficits, either. When the Treasury Department does finally release this data (after the voting takes place on the expensive, Obama health-care bill), whether it reports an $8 trillion or $9 trillion deficit, don't expect the Republicans to expose these lies.

 

The countdown to U.S. bankruptcy is rapidly ticking away – and the American people have no clue about what is really taking place with the finances of their own government. The Orwellian, two-party dictatorship which mis-governs the United States can agree on very little, but the one area where they do achieve perfect consensus is in hiding the truth from the American public.

 

Obviously, the puny $11-trillion U.S. economy can not survive $9 trillion annual deficits for more than a few years before this hopelessly insolvent nation implodes on its debts – in at least as devastating a collapse as what took place in the former Soviet Union. The only 'escape' from this fate is to hyperinflate-away these incomprehensibly huge debts. However, all that such hyperinflation will accomplish is to create an even more horrific collapse a few years later.

 

This matters little to U.S. politicians. No matter how bad things become in the U.S., elected politicians (and their families) will never go hungry. Thus, all that matters to these corrupt opportunists is to get re-elected. Hiding the truth will remain the highest priority of the U.S. political system. When the Treasury Department releases its once-a-year report on the true condition of the U.S. economy (something it only does because it is mandated by law), every U.S. politician will ignore this report, and no mainstream U.S. media outlet will report it (other than in tiny print, buried beneath all other news).

 

There are no “miracle” solutions here. The chance to salvage the U.S. economy – intact – has already passed, years ago. The least-worst option for the American people is to face their national default/debt implosion now – as each year of delaying this only makes the final collapse that much more devastating when it finally takes place.

 

None of the $10 trillion in loans/hand-outs/guarantees to Wall Street should have been wasted on the oligarchs, as every penny of that money is needed to lessen the pain of total economic collapse for the American people. This would be completely obvious to everyone if U.S. politicians and the U.S. propaganda-machine stopped hiding imminent, financial Armageddon from the American people.

 

What is truly astounding, at this point, is how and why foreign creditors have failed to notice the true state of U.S. finances. Unlike the convoluted fiction of the U.S. “official” deficit, this GAAP accounting of the true state of U.S. finances is crystal-clear: the U.S. economy is hopelessly insolvent.

 

On the day that the true state of the U.S. economy finally becomes common knowledge, Americans can also expect to be totally cut-off from all foreign credit – unless and until the U.S. formally defaults. This is another reason why hyperinflation is 100% inevitable, if the U.S. continues to delay its debt-default.

 

The propagandists are unable to twist numbers as clear (and as huge) as the real U.S. deficit – and so they simply refuse to report it.



Disclosure: none]]> U.S. economy U.S. propaganda U.S. corruption The Dynamics of Debt http://seekingalpha.com/instablog/407380-jeff-nielson/38246-the-dynamics-of-debt?source=feed 38246 Having studied economics for four years, I have little use for most economists. Today, such skepticism is widely-shared – after these “experts” displayed their lack of comprehension for all the world to see. Apart from a handful of economists (generally all rebels against current, economic dogma), this entire community showed itself incapable of even seeing the largest asset-bubble in history – let alone understanding the consequences of that bursting bubble.

 

In my case, my lack of confidence in these “experts” dates all the way back to the 1980's, when I was studying economics. I was both frustrated and mystified that it was impossible to engage these people in “real world” debates – since the economics professors I studied under were simply incapable of recognizing anything that was not included and explained by their economic “models”.

 

This strikes at the core of the failings of economics: its dependency on models. The desire to construct economic models of market behavior and analysis is understandable: a good model can be a powerful forecasting tool for the future. The problem is that every economic model is based upon a long list of assumptions. In every case, some of these assumptions are dubious, while others are simply ridiculous.

 

Modern economics is based upon the theories and models of “neoclassical” economists. Often they are simply referred to as “Keynesians” - in recognition of the hero of neoclassical theory, John Keynes. Critics of these ivory-tower academics (like myself) disparagingly refer to the slogan of such economists as “deficits don't matter”. However, what I didn't truly understand previously is that this mantra actually understates the gross deficiencies of this “school” of economics.

 

Once again, I tip my hat to economist, Steve Keen – whose Debtwatch blog I have referred to in the past. Though his own name bears a great similarity to the icon of neoclassical economics, Dr. Keen is a harsh critic of Keynes. This is because Dr. Keen is among the minority of economists who reject neoclassical theory in favor of a branch of economics generally associated with the Austrian School of economics – with the most acclaimed theorist of this camp being Ludwig von Mises. More recently, this branch of economics was championed by Hyman Minsky.

 

Rejecting neoclassical theory doesn't require an economics degree, or any economics training at all. Any child who has mastered the fundamentals of arithmetic can point out the absurdity of the assertion that “deficits don't matter”. As deficits are piled atop each other, year after year, the simple addition of these debts (along with their compounding interest payments) will inevitably reach a point where the costs of servicing this debt become so large that it becomes impossible for an economy to grow any further – as too large a percentage of total resources becomes consumed through interest payments on debt (with none of the “principal” ever being repaid).

 

To reduce this to a simple analogy, the grossly excessive debts of several Western economies (with the U.S. and U.K being the “poster boys” for such recklessness) have grown to become a burden equal to a homeowner trying to make monthly payments on a $1 million mortgage – while only earning $10,000/year.

 

Describing a process of this nature is referred to as “dynamic” analysis, since it includes and explains changes over time. The other form of analysis is “static” analysis. This can be thought of as an analytical “snapshot” since static analysis never accounts for changes over time.

 

It was always utterly incomprehensible to me how anyone could embrace neoclassical theory – since presumably everyone with an economics degree had to successfully “pass” elementary school arithmetic first. Dr. Keen has enlightened me on this point with his own, recent blog-posts. Quite simply, neoclassical economics is an entirely “static” form of analysis – which never accounts for or explains the consequences of economic policies such as fiscal deficits. Worse still, not only does neoclassical theory not include the consequences of compounding debt, according to Dr. Keen, it simply excludes debt from its economic “model” completely.

 

Suddenly, the monumental ignorance of neoclassical economists becomes clear for all to see. Obviously economists who don't even recognize the existence of debt cannot be expected to understand the consequences of something they pretend does not exist. Perhaps that is an unduly harsh characterization, and it would be more accurate to state that they simply assume that debt is an irrelevant component of analysis.

 

The Keynesians “justify” ignoring debt/deficits by simply assuming that governments will always keep the growth of debt lower than the overall growth of an economy – thus in proportional terms debts/deficits never become a “significant” variable to their model. Obviously we all know how absurd an assumption that has been!

 

For neoclassical theory to possibly be valid, our governments would have to exercise absolute discipline with respect to their spending. In economic downturns, governments need to engage in “stimulus” to counter those forces of contraction. This always means deficit-spending above the rate of economic growth. Thus, for the Keynesian model to be sustainable over the long term, after every economic contraction, governments would have to reduce deficits substantially below the rate of growth of the economy – to pay-off the additional debt (plus interest) which was accumulated.

 

In the real world, however (a place never visited by the Keynesians), very few governments have shown such discipline in running (ruining?) their economies. Among G-8 economies, only Canada has engaged in sustainable fiscal policies in recent years – and this was only after a debt-crisis which nearly destroyed this economy. Every other G-8 government has engaged in a level of deficits (and debt) which totally invalidates neoclassical theory, and even the current policies of the (new) Canadian government have regressed back to unsustainable deficit-financing.

 

Despite this fact, the Keynesians simply continue to bury their heads in the sand. They refuse to acknowledge the obvious fact that one of their key assumptions has been rendered completely invalid. They have little choice – unless they are willing to swallow their pride, go back to “the drawing board”, and refine their analysis into a dynamic model which accounts for changes in debt (i.e. the growth of debt) over time.

 

The problem is that the governments of most industrialized economies continue to base their fiscal policies (and analysis of those policies) on an economic model which has been proven to have no validity in the real world. It is this massive “blind spot” which explains why governments believe they can “solve” problems which were caused by excessive debts/deficits through even more excessive debts/deficits.

 

Thus every time you read/see/hear of yet another government policy, adding yet more debt to the current (unsustainable) deficits, know that no one in your government is even considering the consequences of that additional debt (let alone understanding those consequences). Yes, these talking-heads will say that they understand the consequences – however, all of these governments are relying upon policy advice from a group of academics, who (as a matter of dogma/bias) never consider the consequences of additional debt.

 

There are still Western economies which have not yet become so over-burdened with debt that their economies have reached a “point of no return” with regard to their debt-spirals. However, the majority of industrialized economies can be characterized as vehicles which are not merely driving toward a cliff, but rapidly accelerating as they race toward that chasm.

 

While gold-bears, and novice-bulls (who have just jumped on the bandwagon) like to refer to gold as only a “hedge against inflation”, the reality is that in addition to that quality precious metals are the ultimate “insurance policy” against current fiscal insanity. With “fiat currencies” officially backed by nothing, these scraps of paper can only have an intrinsic value based upon the net worth of the economy which is issuing that currency.

 

As more and more of these economies descend into a status of negative net worth (due to exponential increases in debt), the currencies of these economies are literally worth nothing. Among all currencies, only precious metals are beyond the reach of governments in destroying their value.

 

Remember that inflation is always a “monetary phenomenon”. In other words, real “inflation” is nothing more than the value of a currency being destroyed. Thus, when unsophisticated gold bulls and bears talk about gold as a “hedge against inflation”, what they are really saying (if their comprehension was greater) is that gold protects the people of a society from the continuous destruction of their currencies by governments.

 

Ultimately, these governments will “succeed”: they will literally drag the value of their paper currencies down to zero. Given those dynamics, gold suddenly looks exceedingly cheap – even at $1200US/oz.



Disclosure: none]]> Thu, 03 Dec 2009 11:56:52 -0500 Having studied economics for four years, I have little use for most economists. Today, such skepticism is widely-shared – after these “experts” displayed their lack of comprehension for all the world to see. Apart from a handful of economists (generally all rebels against current, economic dogma), this entire community showed itself incapable of even seeing the largest asset-bubble in history – let alone understanding the consequences of that bursting bubble.

 

In my case, my lack of confidence in these “experts” dates all the way back to the 1980's, when I was studying economics. I was both frustrated and mystified that it was impossible to engage these people in “real world” debates – since the economics professors I studied under were simply incapable of recognizing anything that was not included and explained by their economic “models”.

 

This strikes at the core of the failings of economics: its dependency on models. The desire to construct economic models of market behavior and analysis is understandable: a good model can be a powerful forecasting tool for the future. The problem is that every economic model is based upon a long list of assumptions. In every case, some of these assumptions are dubious, while others are simply ridiculous.

 

Modern economics is based upon the theories and models of “neoclassical” economists. Often they are simply referred to as “Keynesians” - in recognition of the hero of neoclassical theory, John Keynes. Critics of these ivory-tower academics (like myself) disparagingly refer to the slogan of such economists as “deficits don't matter”. However, what I didn't truly understand previously is that this mantra actually understates the gross deficiencies of this “school” of economics.

 

Once again, I tip my hat to economist, Steve Keen – whose Debtwatch blog I have referred to in the past. Though his own name bears a great similarity to the icon of neoclassical economics, Dr. Keen is a harsh critic of Keynes. This is because Dr. Keen is among the minority of economists who reject neoclassical theory in favor of a branch of economics generally associated with the Austrian School of economics – with the most acclaimed theorist of this camp being Ludwig von Mises. More recently, this branch of economics was championed by Hyman Minsky.

 

Rejecting neoclassical theory doesn't require an economics degree, or any economics training at all. Any child who has mastered the fundamentals of arithmetic can point out the absurdity of the assertion that “deficits don't matter”. As deficits are piled atop each other, year after year, the simple addition of these debts (along with their compounding interest payments) will inevitably reach a point where the costs of servicing this debt become so large that it becomes impossible for an economy to grow any further – as too large a percentage of total resources becomes consumed through interest payments on debt (with none of the “principal” ever being repaid).

 

To reduce this to a simple analogy, the grossly excessive debts of several Western economies (with the U.S. and U.K being the “poster boys” for such recklessness) have grown to become a burden equal to a homeowner trying to make monthly payments on a $1 million mortgage – while only earning $10,000/year.

 

Describing a process of this nature is referred to as “dynamic” analysis, since it includes and explains changes over time. The other form of analysis is “static” analysis. This can be thought of as an analytical “snapshot” since static analysis never accounts for changes over time.

 

It was always utterly incomprehensible to me how anyone could embrace neoclassical theory – since presumably everyone with an economics degree had to successfully “pass” elementary school arithmetic first. Dr. Keen has enlightened me on this point with his own, recent blog-posts. Quite simply, neoclassical economics is an entirely “static” form of analysis – which never accounts for or explains the consequences of economic policies such as fiscal deficits. Worse still, not only does neoclassical theory not include the consequences of compounding debt, according to Dr. Keen, it simply excludes debt from its economic “model” completely.

 

Suddenly, the monumental ignorance of neoclassical economists becomes clear for all to see. Obviously economists who don't even recognize the existence of debt cannot be expected to understand the consequences of something they pretend does not exist. Perhaps that is an unduly harsh characterization, and it would be more accurate to state that they simply assume that debt is an irrelevant component of analysis.

 

The Keynesians “justify” ignoring debt/deficits by simply assuming that governments will always keep the growth of debt lower than the overall growth of an economy – thus in proportional terms debts/deficits never become a “significant” variable to their model. Obviously we all know how absurd an assumption that has been!

 

For neoclassical theory to possibly be valid, our governments would have to exercise absolute discipline with respect to their spending. In economic downturns, governments need to engage in “stimulus” to counter those forces of contraction. This always means deficit-spending above the rate of economic growth. Thus, for the Keynesian model to be sustainable over the long term, after every economic contraction, governments would have to reduce deficits substantially below the rate of growth of the economy – to pay-off the additional debt (plus interest) which was accumulated.

 

In the real world, however (a place never visited by the Keynesians), very few governments have shown such discipline in running (ruining?) their economies. Among G-8 economies, only Canada has engaged in sustainable fiscal policies in recent years – and this was only after a debt-crisis which nearly destroyed this economy. Every other G-8 government has engaged in a level of deficits (and debt) which totally invalidates neoclassical theory, and even the current policies of the (new) Canadian government have regressed back to unsustainable deficit-financing.

 

Despite this fact, the Keynesians simply continue to bury their heads in the sand. They refuse to acknowledge the obvious fact that one of their key assumptions has been rendered completely invalid. They have little choice – unless they are willing to swallow their pride, go back to “the drawing board”, and refine their analysis into a dynamic model which accounts for changes in debt (i.e. the growth of debt) over time.

 

The problem is that the governments of most industrialized economies continue to base their fiscal policies (and analysis of those policies) on an economic model which has been proven to have no validity in the real world. It is this massive “blind spot” which explains why governments believe they can “solve” problems which were caused by excessive debts/deficits through even more excessive debts/deficits.

 

Thus every time you read/see/hear of yet another government policy, adding yet more debt to the current (unsustainable) deficits, know that no one in your government is even considering the consequences of that additional debt (let alone understanding those consequences). Yes, these talking-heads will say that they understand the consequences – however, all of these governments are relying upon policy advice from a group of academics, who (as a matter of dogma/bias) never consider the consequences of additional debt.

 

There are still Western economies which have not yet become so over-burdened with debt that their economies have reached a “point of no return” with regard to their debt-spirals. However, the majority of industrialized economies can be characterized as vehicles which are not merely driving toward a cliff, but rapidly accelerating as they race toward that chasm.

 

While gold-bears, and novice-bulls (who have just jumped on the bandwagon) like to refer to gold as only a “hedge against inflation”, the reality is that in addition to that quality precious metals are the ultimate “insurance policy” against current fiscal insanity. With “fiat currencies” officially backed by nothing, these scraps of paper can only have an intrinsic value based upon the net worth of the economy which is issuing that currency.

 

As more and more of these economies descend into a status of negative net worth (due to exponential increases in debt), the currencies of these economies are literally worth nothing. Among all currencies, only precious metals are beyond the reach of governments in destroying their value.

 

Remember that inflation is always a “monetary phenomenon”. In other words, real “inflation” is nothing more than the value of a currency being destroyed. Thus, when unsophisticated gold bulls and bears talk about gold as a “hedge against inflation”, what they are really saying (if their comprehension was greater) is that gold protects the people of a society from the continuous destruction of their currencies by governments.

 

Ultimately, these governments will “succeed”: they will literally drag the value of their paper currencies down to zero. Given those dynamics, gold suddenly looks exceedingly cheap – even at $1200US/oz.



Disclosure: none]]> economics debt gold How to Invest in the Precious Metals Market http://seekingalpha.com/instablog/407380-jeff-nielson/38096-how-to-invest-in-the-precious-metals-market?source=feed 38096 Knowing that there are growing numbers of precious metals investors who are new to this sector, I've tried to provide some educational commentaries to help people learn to invest in this sector on their own. Previous commentaries have explained the “leverage” offered by precious metals miners, grouped these companies into specific categories, and provided criteria for evaluating these investments.

 

This time I will seek to pass along some strategic advice on how investors may want to manage their precious metals portfolio. Given that investors have different needs/goals, different levels of risk-tolerance, and different perspectives on this sector, these tips should be considered merely guidelines – rather than some rigid formula.

 

The place to start in planning your strategy for precious metals investments is to decide on how you wish to allocate your capital between gold and silver. I have made no secret that I consider silver to have superior supply/demand fundamentals. This is due in large part to the fact that global silver inventories have been severely depleted, with two-thirds of current inventories comprised of silver supposedly “held” by silver bullion-ETF's.

 

However, more conservative investors may prefer to focus their holdings on gold – given that (currently) it has superior status as both a “store of wealth” and a currency, in most markets around the world. For convenience, I will simply assume that investors have no preference for either metal, and base my advice accordingly.

 

Many commentators in this sector (including me) have urged investors to focus on the gold/silver price ratio to guide them in which metal to buy at any given time. As I have mentioned on several previous occasions, during the roughly 5,000 years that our species has used these metals as currencies, the average price ratio is roughly 15:1. As of this moment, the gold silver ratio is very close to 60:1. Thus, even accounting for a preference for gold over silver, this ratio is clearly skewed to favor silver.

 

For those who would like a very simple means of allocating their precious metals dollars, let the gold/silver ratio dictate where your dollars go, through purchasing silver in a percentage equal to the current ratio. In this case, with the ratio at 60:1, this would dictate putting 60% of new dollars into silver/silver mining stocks, and the remaining 40% into gold/gold mining stocks.

 

Even as someone who strongly favors silver over gold, this is approximately the ratio I'm using with my own investments. The reason for not investing even more heavily in silver (given my own preference) is that commensurate with a price ratio which values gold heavily above silver, assets in the gold sector are currently getting better valuations than in the silver sector.

 

Assuming that no investors are simply buying and holding everything for the long-term, this implies a desire to take profits to lock-in gains along the way. During this current rally, almost all my profit-taking has taken place with my gold mining stocks, because I'm simply not willing to sell any of my silver holdings – given their very modest valuations (in my own assessment).

 

Lest some critic jump to the conclusion that my “profit-taking” implies that I'm starting to “bail-out” of my own positions, I just finished re-investing two-thirds of those profits – on the brief pull-back which occurred in the “delayed reaction” to the Dubai default. At this point, I've seen no indications that the current rally is over-extended, and was happy to put more of my own money into two of my favorite miners.

 

Once investors decide how they wish to distribute their precious metals dollars between gold and silver, the next decision to make is in what form of precious metals holdings should they invest. As I have warned on many occasions, do not invest in the large (so-called) bullion ETF's – like GLD and SLV. There are many reasons to doubt the legitimacy of these funds, which I have detailed in several previous commentaries.

 

For those who are adamant about using bullion-ETF's rather than holding the “physical” metal directly, you must do your homework. Examine the prospectus carefully, and automatically shun any fund which does not hold/store all of its own bullion. Keep in mind that the “custodians” of the vast majority of ETF “bullion” are the same bullion-banks who are currently holding the largest short positions in gold and silver in history. Do you really think these bankers want to help small, retail investors enter this market (and undermine their massive “short” positions)?

 

Assuming investors allocate 100% of their precious metals dollars in real bullion or precious metals mining companies, the percentage to assign to those two categories is partially a function of risk-tolerance and partly an issue of time-horizon.

 

I can certainly understand after the events of the last year that many investors are much more concerned with maximizing the safety of their investments, rather than simply seeking to maximize profits. I would not fault any investor for choosing to invest all of their precious metals capital into bullion. This is especially true for investors only wishing to focus a small part of their portfolio into this sector. For more elderly investors with a short investment horizon, it would also be prudent to focus on bullion, itself.

 

For those investors who are wishing to invest 20%, or 25% (or even a greater percentage) into precious metals, I would strongly urge investors to put at least ¼ of those dollars into the stocks of quality precious metals miners. Even in the event of a complete breakdown in the global monetary system (which remains a distinct possibility), the worst-case scenario for holders of these equities is that they could become completely illiquid for an indefinite period. However, with gold and silver as the best “stores of value” of any asset-class, clearly the companies that produce these hard assets would be favored above any other class of equity – and would thus be first to regain their value as markets returned to normal.

 

For more aggressive investors, or those with a longer investment horizon, I would suggest that at least 50% of their precious metals dollars be invested in the miners – since they will always outperform bullion over the course of any bull market in precious metals. As I have detailed previously, it is the “junior” miners (and especially junior producers) who provide the best risk/reward profiles amongst the mining companies.

 

Of course, placing your investments in this sector is literally only half of the task of managing your precious metals portfolio. Regular profit-taking is an essential part of any long-term investment strategy, so deciding how/when to take profits is a critical determinant in the long-term performance of your investments. As a firm believer in the KISS principle (“keep it simple, stupid”), again I would suggest a very basic strategy: do not sell any of your bullion holdings.

 

Given that the mining companies offer superior performance to bullion, itself, trading and profit-taking exclusively through buying and selling these shares provides ample opportunities to lock-in gains – with the greater volatility of the mining shares giving investors the best opportunities to re-invest their profits on the inevitable dips which occur in even the strongest sectors.

 

As for when to take profits, in this case precious metals are no different than any other asset class. Many investors strongly favor selling half their positions on a “double” (a 100% gain), so that your remaining investment represents “free shares” - already fully paid-for through profit-taking. Personally, I don't like to be that rigid with my own buying and selling.

 

With my favorite holdings, I rarely sell more than ¼ at any time. On the other hand, with companies which I don't regard quite as highly, I'm quite happy to sell 100% on any short-term spike – as there are no shortage of quality, under-valued companies to pick from. For those who are investing in the junior miners, do not allow yourself to “fall in love” with any of these companies.

 

Seeing some of the spectacular gains which these companies have achieved just in this current rally, the temptation for novices to this sector is to look for a “home run” - and put most/all of their precious metals capital into one or two companies which they see as “can't miss” prospects. Never forget that there is always risk with these companies, no matter how competent or conservative is the management team.

 

Accidents occur, governments change, and there are always the dreaded “Acts of God”. You must distribute your dollars into a basket of these companies. As I suggested earlier, for those only wanting to put a small portion of their capital into this sector, you are much better off to stick with buying bullion, rather than placing a “bet” on just one or two mining companies.

 

I personally have more than ¾ of my own portfolio concentrated in this sector – with that ratio having risen substantially due to the outperformance of this sector. I am fully conscious of the conventional wisdom of “diversifying” into many sectors/asset-classes under normal conditions. However, if I have accomplished nothing else with my own writing, hopefully I have made it clear to people that “this time it is different”.

 

The last forty years is the first time in history that the entire, global financial system has been completely detached from a gold-standard. In every individual instance of purely “fiat” currencies (i.e. money backed by nothing), this banker-driven adventure has ended badly. Now, for the first time, the current system is facing the imminent risk of collapse.

 

As is always the case, the cause of this instability is the grossly excessive (and extremely unstable) mountains of debt (created by the bankers), combined with recklessly “easy” monetary policies (also courtesy of the bankers) which are fueling a rapid expansion of these mountains of debt. Unless an investor truly believes that you can “put out a fire with gasoline”, there is only one way this recklessness can end.

 

This doesn't mean that everyone should put 100% of their investments into precious metals (or even close to it). What it does mean is that investors must be focused first and foremost on protecting their wealth – and only once that is accomplished do we have the luxury of seeking to maximize returns.

 

Other classes of “hard assets” are also valid alternatives, however, real estate is (currently) not one of the hard assets which investors can use to protect themselves. The “easy money” supplied by the bankers means that real estate markets around the world have been flooded with new housing inventories – and despite the massive supplies in most markets, real estate valuations remain inflated.

 

The precious metals sector is not the only place for people to make their investments, it's simply the best sector. No other category of investment offers the combination of wealth preservation with superior up-side, investment potential. However, this does not mean that those investing in this sector can afford to be lazy or complacent.

 

The generational shifts taking place in our societies, economies, and markets means that we will see unprecedented volatility – and no shortage of “shocks” to markets. Because there are so many major stresses at work in the global economy (mostly derived from excessive debt/leverage), there are a near-infinite number of possible calamities ahead.

 

Focusing a significant portion of one's portfolio into the precious metals sector provides a realistic strategy for small investors to protect themselves – versus the option of leaping from sector-to-sector as various crises unfold in the years ahead. As with all investment cycles, those who engage in such preparation first will be amongst those who benefit most from this strategy.

[Disclosure:  I hold no position in SLV or GLD]



Disclosure: no position in GLD or SLV]]> Wed, 02 Dec 2009 13:16:31 -0500 Knowing that there are growing numbers of precious metals investors who are new to this sector, I've tried to provide some educational commentaries to help people learn to invest in this sector on their own. Previous commentaries have explained the “leverage” offered by precious metals miners, grouped these companies into specific categories, and provided criteria for evaluating these investments.

 

This time I will seek to pass along some strategic advice on how investors may want to manage their precious metals portfolio. Given that investors have different needs/goals, different levels of risk-tolerance, and different perspectives on this sector, these tips should be considered merely guidelines – rather than some rigid formula.

 

The place to start in planning your strategy for precious metals investments is to decide on how you wish to allocate your capital between gold and silver. I have made no secret that I consider silver to have superior supply/demand fundamentals. This is due in large part to the fact that global silver inventories have been severely depleted, with two-thirds of current inventories comprised of silver supposedly “held” by silver bullion-ETF's.

 

However, more conservative investors may prefer to focus their holdings on gold – given that (currently) it has superior status as both a “store of wealth” and a currency, in most markets around the world. For convenience, I will simply assume that investors have no preference for either metal, and base my advice accordingly.

 

Many commentators in this sector (including me) have urged investors to focus on the gold/silver price ratio to guide them in which metal to buy at any given time. As I have mentioned on several previous occasions, during the roughly 5,000 years that our species has used these metals as currencies, the average price ratio is roughly 15:1. As of this moment, the gold silver ratio is very close to 60:1. Thus, even accounting for a preference for gold over silver, this ratio is clearly skewed to favor silver.

 

For those who would like a very simple means of allocating their precious metals dollars, let the gold/silver ratio dictate where your dollars go, through purchasing silver in a percentage equal to the current ratio. In this case, with the ratio at 60:1, this would dictate putting 60% of new dollars into silver/silver mining stocks, and the remaining 40% into gold/gold mining stocks.

 

Even as someone who strongly favors silver over gold, this is approximately the ratio I'm using with my own investments. The reason for not investing even more heavily in silver (given my own preference) is that commensurate with a price ratio which values gold heavily above silver, assets in the gold sector are currently getting better valuations than in the silver sector.

 

Assuming that no investors are simply buying and holding everything for the long-term, this implies a desire to take profits to lock-in gains along the way. During this current rally, almost all my profit-taking has taken place with my gold mining stocks, because I'm simply not willing to sell any of my silver holdings – given their very modest valuations (in my own assessment).

 

Lest some critic jump to the conclusion that my “profit-taking” implies that I'm starting to “bail-out” of my own positions, I just finished re-investing two-thirds of those profits – on the brief pull-back which occurred in the “delayed reaction” to the Dubai default. At this point, I've seen no indications that the current rally is over-extended, and was happy to put more of my own money into two of my favorite miners.

 

Once investors decide how they wish to distribute their precious metals dollars between gold and silver, the next decision to make is in what form of precious metals holdings should they invest. As I have warned on many occasions, do not invest in the large (so-called) bullion ETF's – like GLD and SLV. There are many reasons to doubt the legitimacy of these funds, which I have detailed in several previous commentaries.

 

For those who are adamant about using bullion-ETF's rather than holding the “physical” metal directly, you must do your homework. Examine the prospectus carefully, and automatically shun any fund which does not hold/store all of its own bullion. Keep in mind that the “custodians” of the vast majority of ETF “bullion” are the same bullion-banks who are currently holding the largest short positions in gold and silver in history. Do you really think these bankers want to help small, retail investors enter this market (and undermine their massive “short” positions)?

 

Assuming investors allocate 100% of their precious metals dollars in real bullion or precious metals mining companies, the percentage to assign to those two categories is partially a function of risk-tolerance and partly an issue of time-horizon.

 

I can certainly understand after the events of the last year that many investors are much more concerned with maximizing the safety of their investments, rather than simply seeking to maximize profits. I would not fault any investor for choosing to invest all of their precious metals capital into bullion. This is especially true for investors only wishing to focus a small part of their portfolio into this sector. For more elderly investors with a short investment horizon, it would also be prudent to focus on bullion, itself.

 

For those investors who are wishing to invest 20%, or 25% (or even a greater percentage) into precious metals, I would strongly urge investors to put at least ¼ of those dollars into the stocks of quality precious metals miners. Even in the event of a complete breakdown in the global monetary system (which remains a distinct possibility), the worst-case scenario for holders of these equities is that they could become completely illiquid for an indefinite period. However, with gold and silver as the best “stores of value” of any asset-class, clearly the companies that produce these hard assets would be favored above any other class of equity – and would thus be first to regain their value as markets returned to normal.

 

For more aggressive investors, or those with a longer investment horizon, I would suggest that at least 50% of their precious metals dollars be invested in the miners – since they will always outperform bullion over the course of any bull market in precious metals. As I have detailed previously, it is the “junior” miners (and especially junior producers) who provide the best risk/reward profiles amongst the mining companies.

 

Of course, placing your investments in this sector is literally only half of the task of managing your precious metals portfolio. Regular profit-taking is an essential part of any long-term investment strategy, so deciding how/when to take profits is a critical determinant in the long-term performance of your investments. As a firm believer in the KISS principle (“keep it simple, stupid”), again I would suggest a very basic strategy: do not sell any of your bullion holdings.

 

Given that the mining companies offer superior performance to bullion, itself, trading and profit-taking exclusively through buying and selling these shares provides ample opportunities to lock-in gains – with the greater volatility of the mining shares giving investors the best opportunities to re-invest their profits on the inevitable dips which occur in even the strongest sectors.

 

As for when to take profits, in this case precious metals are no different than any other asset class. Many investors strongly favor selling half their positions on a “double” (a 100% gain), so that your remaining investment represents “free shares” - already fully paid-for through profit-taking. Personally, I don't like to be that rigid with my own buying and selling.

 

With my favorite holdings, I rarely sell more than ¼ at any time. On the other hand, with companies which I don't regard quite as highly, I'm quite happy to sell 100% on any short-term spike – as there are no shortage of quality, under-valued companies to pick from. For those who are investing in the junior miners, do not allow yourself to “fall in love” with any of these companies.

 

Seeing some of the spectacular gains which these companies have achieved just in this current rally, the temptation for novices to this sector is to look for a “home run” - and put most/all of their precious metals capital into one or two companies which they see as “can't miss” prospects. Never forget that there is always risk with these companies, no matter how competent or conservative is the management team.

 

Accidents occur, governments change, and there are always the dreaded “Acts of God”. You must distribute your dollars into a basket of these companies. As I suggested earlier, for those only wanting to put a small portion of their capital into this sector, you are much better off to stick with buying bullion, rather than placing a “bet” on just one or two mining companies.

 

I personally have more than ¾ of my own portfolio concentrated in this sector – with that ratio having risen substantially due to the outperformance of this sector. I am fully conscious of the conventional wisdom of “diversifying” into many sectors/asset-classes under normal conditions. However, if I have accomplished nothing else with my own writing, hopefully I have made it clear to people that “this time it is different”.

 

The last forty years is the first time in history that the entire, global financial system has been completely detached from a gold-standard. In every individual instance of purely “fiat” currencies (i.e. money backed by nothing), this banker-driven adventure has ended badly. Now, for the first time, the current system is facing the imminent risk of collapse.

 

As is always the case, the cause of this instability is the grossly excessive (and extremely unstable) mountains of debt (created by the bankers), combined with recklessly “easy” monetary policies (also courtesy of the bankers) which are fueling a rapid expansion of these mountains of debt. Unless an investor truly believes that you can “put out a fire with gasoline”, there is only one way this recklessness can end.

 

This doesn't mean that everyone should put 100% of their investments into precious metals (or even close to it). What it does mean is that investors must be focused first and foremost on protecting their wealth – and only once that is accomplished do we have the luxury of seeking to maximize returns.

 

Other classes of “hard assets” are also valid alternatives, however, real estate is (currently) not one of the hard assets which investors can use to protect themselves. The “easy money” supplied by the bankers means that real estate markets around the world have been flooded with new housing inventories – and despite the massive supplies in most markets, real estate valuations remain inflated.

 

The precious metals sector is not the only place for people to make their investments, it's simply the best sector. No other category of investment offers the combination of wealth preservation with superior up-side, investment potential. However, this does not mean that those investing in this sector can afford to be lazy or complacent.

 

The generational shifts taking place in our societies, economies, and markets means that we will see unprecedented volatility – and no shortage of “shocks” to markets. Because there are so many major stresses at work in the global economy (mostly derived from excessive debt/leverage), there are a near-infinite number of possible calamities ahead.

 

Focusing a significant portion of one's portfolio into the precious metals sector provides a realistic strategy for small investors to protect themselves – versus the option of leaping from sector-to-sector as various crises unfold in the years ahead. As with all investment cycles, those who engage in such preparation first will be amongst those who benefit most from this strategy.

[Disclosure:  I hold no position in SLV or GLD]



Disclosure: no position in GLD or SLV]]> gold silver precious metals miners 'Black Friday' retail sales decline versus '08 http://seekingalpha.com/instablog/407380-jeff-nielson/37747-black-friday-retail-sales-decline-versus-08?source=feed 37747 The U.S. propaganda-machine has been steadily ratcheting-up expectations for the 2009 holiday-shopping season. This is not surprising. As a consumer economy, the health of the retail sector is critical to the overall health of the U.S. economy, and the retail sector itself is totally dependent on the Christmas shopping season.

 

Clearly the U.S. government cannot pretend the U.S. (consumer) economy is “growing” if, in fact, retail sales are declining. Officially, the preliminary reading for “Black Friday” sales (the day after U.S. Thanksgiving) showed a tiny 0.5% increase. However, that figure is not adjusted for inflation.

 

John Williams, of Shadowstats.com has pointed out that while official inflation showed the largest decline (i.e. deflation) since 1950, that if the same methods of measurement were used today as in 1950 that it “did not drop below 5%, at worst, in the current cycle”. Thus, while Americans might have spent a tiny bit more money this year, they purchased less goods.

 

With profit margins for U.S. retailers severely squeezed due to a Wal-Mart-led “price war”, selling less goods for less profit obviously means a worse holiday shopping season than last year – which was already billed as “the worst in 40 years”.

 

This “surprising” weakness in the U.S. retail sector cannot be over-emphasized. Last year, holiday shoppers were shell-shocked by the combination of a stock market crash, an economic collapse, the disintegration of the U.S. housing market, and the most-rapid rate of job losses in more than 70 years.

 

All of those factors are now supposedly behind U.S. shoppers, with the economy supposedly growing, the stock market pumped-up to recover most of the 2008 losses, and job losses have supposedly slowed to a modest rate – yet they still bought less.

 

The fact that all these supposed improvements in the U.S. economy have had zero positive impact on the U.S. retail sector illustrates two points which I have made on several occasions. First of all, it confirms my previous assertions that the U.S. economy is not growing (see “The U.S. Economy is NOT Growing”), there has been little improvement in U.S. unemployment (see “Wall Street Invents New Jobs Propaganda”), and the U.S. housing market is not even close to a “bottom” (“Housing Sector Mirage”).

 

More specifically, it confirms my previous analysis of the U.S. retail sector (see “Death of the U.S. Consumer”). This is not “rocket science”, nor even complex economics. It's all just simple arithmetic. With falling employment income, dramatically reduced wealth, and no access to additional credit, it's obvious that U.S. consumers can't spend more.

 

This is why I keep pointing out how totally irrelevant U.S. “consumer confidence” reports have become. It doesn't matter how “confident” consumers are if they have no money and no credit. Indeed, the U.S. economy would be in much better shape if it had a population full of gloomy-but-rich consumers, rather than the “confident” but broke consumers which must (try to) support this sector.

 

However, as bad as the headline number was from Black Friday shopping, the details of this data are even more troubling with respect to the future of the U.S. economy. As I pointed out originally in “The Death of the U.S. Consumer Economy”, lower margins and lower sales volumes are strangling the U.S. retail sector – which still has considerable excess capacity versus the new habits of U.S. consumers. This means that “cost cutting” is now the most important strategy for all retailers.

 

Sadly, we already know what this means: massive lay-offs. This was already “in the cards” even before Friday's dismal results. As I pointed out in previous commentaries, U.S. retailers have already decided that moving away from retail outlets and towards much more on-line retailing is the only path toward survival.

 

Friday's data showed that while overall shopping volumes fell, on-line sales rose by 35% (on a nominal basis) versus a year earlier. However, currently, on-line sales account for less than 4% of total retail sales. What these shopping numbers dictate is that U.S. retailers must try to sell most of their goods on-line if they want to survive this generational shift in U.S. consumption habits.

 

The problem for the U.S. economy is that on-line retailing requires only a tiny fraction of the employees required for retail outlets. The frantic shift by U.S. retailers to boost on-line operations and dramatically reduce retail stores means that tens of millions of U.S. retail sector jobs are at risk – if not already doomed.

 

Meanwhile, the greatest collapse in government revenues in U.S. history means that all levels of government will also dramatically reduce employment. Thus, the U.S. economy is facing the combination of a collapse in employment in its largest sector (retail), and a collapse in government employment – which was the largest source of new jobs over the last decade.

 

As I have driven home previously, the U.S. consumer economy is in a downward death-spiral, where less spending leads to less jobs, which leads to even less spending, and even fewer jobs. With roughly $2 trillion in lost spending-power from the peak of the U.S. housing bubble, the approximately $250 billion in Obama “stimulus” (which actually reached the economy this year) could never possibly have been enough to halt the downward momentum in the U.S. economy.

 

The anemic results of Black Friday can be expected to instill panic among U.S. retailers – many of whom were dependent on a strong holiday shopping season just to survive. Thus, we can expect to see even more self-destructive price-slashing between retailers. The all-out effort to take shopping dollars away from other competitors means profit-margins reduced to zero. Even the “winners” of this holiday shopping season will end up as losers.

 

It will not be a “Merry Christmas” in the U.S. economy this year. While there is little joy in playing the role of “the Grinch”, it is obviously more important to be accurate and honest in assessing this dire situation than being mindlessly optimistic (or simply deceitful).

 

“Black Friday” originally received its nickname based on the fact that it was this seasonal shopping-orgy which was relied upon to move U.S. retailers “into the black” (i.e. profitability) for the year, as a whole. However, these “orgies” are becoming more like “wakes” - signaling the death of countless U.S. retailers. It thus becomes inevitable that “Black Friday” will take on a much more bleak connotation for U.S. retailers in the years to come.

[Disclosure: I hold no position in Wal-Mart]

]]> Mon, 30 Nov 2009 11:11:08 -0500 The U.S. propaganda-machine has been steadily ratcheting-up expectations for the 2009 holiday-shopping season. This is not surprising. As a consumer economy, the health of the retail sector is critical to the overall health of the U.S. economy, and the retail sector itself is totally dependent on the Christmas shopping season.

 

Clearly the U.S. government cannot pretend the U.S. (consumer) economy is “growing” if, in fact, retail sales are declining. Officially, the preliminary reading for “Black Friday” sales (the day after U.S. Thanksgiving) showed a tiny 0.5% increase. However, that figure is not adjusted for inflation.

 

John Williams, of Shadowstats.com has pointed out that while official inflation showed the largest decline (i.e. deflation) since 1950, that if the same methods of measurement were used today as in 1950 that it “did not drop below 5%, at worst, in the current cycle”. Thus, while Americans might have spent a tiny bit more money this year, they purchased less goods.

 

With profit margins for U.S. retailers severely squeezed due to a Wal-Mart-led “price war”, selling less goods for less profit obviously means a worse holiday shopping season than last year – which was already billed as “the worst in 40 years”.

 

This “surprising” weakness in the U.S. retail sector cannot be over-emphasized. Last year, holiday shoppers were shell-shocked by the combination of a stock market crash, an economic collapse, the disintegration of the U.S. housing market, and the most-rapid rate of job losses in more than 70 years.

 

All of those factors are now supposedly behind U.S. shoppers, with the economy supposedly growing, the stock market pumped-up to recover most of the 2008 losses, and job losses have supposedly slowed to a modest rate – yet they still bought less.

 

The fact that all these supposed improvements in the U.S. economy have had zero positive impact on the U.S. retail sector illustrates two points which I have made on several occasions. First of all, it confirms my previous assertions that the U.S. economy is not growing (see “The U.S. Economy is NOT Growing”), there has been little improvement in U.S. unemployment (see “Wall Street Invents New Jobs Propaganda”), and the U.S. housing market is not even close to a “bottom” (“Housing Sector Mirage”).

 

More specifically, it confirms my previous analysis of the U.S. retail sector (see “Death of the U.S. Consumer”). This is not “rocket science”, nor even complex economics. It's all just simple arithmetic. With falling employment income, dramatically reduced wealth, and no access to additional credit, it's obvious that U.S. consumers can't spend more.

 

This is why I keep pointing out how totally irrelevant U.S. “consumer confidence” reports have become. It doesn't matter how “confident” consumers are if they have no money and no credit. Indeed, the U.S. economy would be in much better shape if it had a population full of gloomy-but-rich consumers, rather than the “confident” but broke consumers which must (try to) support this sector.

 

However, as bad as the headline number was from Black Friday shopping, the details of this data are even more troubling with respect to the future of the U.S. economy. As I pointed out originally in “The Death of the U.S. Consumer Economy”, lower margins and lower sales volumes are strangling the U.S. retail sector – which still has considerable excess capacity versus the new habits of U.S. consumers. This means that “cost cutting” is now the most important strategy for all retailers.

 

Sadly, we already know what this means: massive lay-offs. This was already “in the cards” even before Friday's dismal results. As I pointed out in previous commentaries, U.S. retailers have already decided that moving away from retail outlets and towards much more on-line retailing is the only path toward survival.

 

Friday's data showed that while overall shopping volumes fell, on-line sales rose by 35% (on a nominal basis) versus a year earlier. However, currently, on-line sales account for less than 4% of total retail sales. What these shopping numbers dictate is that U.S. retailers must try to sell most of their goods on-line if they want to survive this generational shift in U.S. consumption habits.

 

The problem for the U.S. economy is that on-line retailing requires only a tiny fraction of the employees required for retail outlets. The frantic shift by U.S. retailers to boost on-line operations and dramatically reduce retail stores means that tens of millions of U.S. retail sector jobs are at risk – if not already doomed.

 

Meanwhile, the greatest collapse in government revenues in U.S. history means that all levels of government will also dramatically reduce employment. Thus, the U.S. economy is facing the combination of a collapse in employment in its largest sector (retail), and a collapse in government employment – which was the largest source of new jobs over the last decade.

 

As I have driven home previously, the U.S. consumer economy is in a downward death-spiral, where less spending leads to less jobs, which leads to even less spending, and even fewer jobs. With roughly $2 trillion in lost spending-power from the peak of the U.S. housing bubble, the approximately $250 billion in Obama “stimulus” (which actually reached the economy this year) could never possibly have been enough to halt the downward momentum in the U.S. economy.

 

The anemic results of Black Friday can be expected to instill panic among U.S. retailers – many of whom were dependent on a strong holiday shopping season just to survive. Thus, we can expect to see even more self-destructive price-slashing between retailers. The all-out effort to take shopping dollars away from other competitors means profit-margins reduced to zero. Even the “winners” of this holiday shopping season will end up as losers.

 

It will not be a “Merry Christmas” in the U.S. economy this year. While there is little joy in playing the role of “the Grinch”, it is obviously more important to be accurate and honest in assessing this dire situation than being mindlessly optimistic (or simply deceitful).

 

“Black Friday” originally received its nickname based on the fact that it was this seasonal shopping-orgy which was relied upon to move U.S. retailers “into the black” (i.e. profitability) for the year, as a whole. However, these “orgies” are becoming more like “wakes” - signaling the death of countless U.S. retailers. It thus becomes inevitable that “Black Friday” will take on a much more bleak connotation for U.S. retailers in the years to come.

[Disclosure: I hold no position in Wal-Mart]

]]> U.S. retail sector U.S. economy U.S. propaganda Gold Market Fights Back http://seekingalpha.com/instablog/407380-jeff-nielson/37480-gold-market-fights-back?source=feed 37480 There was some quirky behavior in the gold market – as a consequence of the market-shock from the announcement by Dubai World that it was essentially defaulting on its debt. The first reaction of the gold market was a move up, although gold gave up those gains over the course of trading on Thursday.

 

Then there was the much more suspicious move in the gold market the day after the announcement – which (by pure coincidence) occurred when U.S. markets re-opened after the U.S. Thanksgiving. Gold plummeted over 5% in essentially the blink of any eye. It then bounced back nearly as quickly.

 

This “delayed reaction” reeks of the gold-sabotage operations for which the anti-gold cabal have become famous. However, the powerful rebound of not only the precious metals, but also the precious metals miners has provided a vivid illustration of the waning power of that cabal. Ambushing a market which was clearly caught over-weight on the long side is precisely the sort of attack which has been overwhelmingly successful in the past.

 

Those traders who got slapped-down as gold was pushed down through their stops would typically became “gun-shy” after their losses – with the Manipulators using such trepidation to either push the gold market down further, or to at least hold the market down, and prevent the exact sort of snap-back rally we are witnessing Friday.

 

What is clearly new (and unsettling to the cabal) is that this time there was no fear preventing buyers from jumping in and using this large “blip” as a buying opportunity. What is personally more gratifying for me was the bounce-back in the mining equities. As I mentioned in a recent commentary (“Gold Market Strong, but not TOO Strong”), the gold perma-bears had taken a lot of delight in pointing out that the miners had not been leveraging the gains in bullion, itself.

 

They stated the false “conclusion” that this indicated that the precious metals sector was over-extended. In reality (and as I pointed out), the fact that the miners had not leveraged the recent gains in bullion actually signified the fact that this sector was a long ways away from any significant top. If the bears had been right – that under-performance by the miners represented weakness in the sector, then we certainly would not have expected both bullion and the mining equities to rebound so powerfully.

 

As things stand at the moment, this yo-yo movement in the gold market has been nothing more than “the pause that refreshes”. Gold (and silver) has shaken-off its over-bought technical status, and faster than the mainstream talking-heads could point to “technical weakness”, that “weakness” is already past.

 

This event marks the first significant “test” of the precious metals bull market since gold blasted through the $1000-barrier for the 3rd (and final time). It has passed with “flying colours”. Meanwhile, a cash-strapped U.S. government is now pleading for U.S. banks to repay some of their borrowed money – as the total collapse in government revenues has every level of the U.S. government falling short of even dramatically lowered estimates.

 

These revenue “surprises” for the various levels of the U.S. government are exactly what we would expect in an economy publishing grossly fraudulent statistics on GDP, unemployment, and inflation. And this trend can only accelerate – given the fact that the U.S. economic “recovery” was created out of simply telling larger lies about the U.S. economy.

 

With the U.S. federal government pressuring banks for loan-repayments, this in turn, has led to speculation that the U.S. financial sector will be facing another round of massive dilution. Thus, on a day when precious metals were targeted for attack, it is U.S. markets which are looking vulnerable.

 

The aberration of a dead-cat bounce for the U.S. dollar and an up-tick for the U.S. Treasuries bubble also leave those markets poised for a steep sell-off. With everything in U.S. markets looking over-bought (and overdue for significant corrections), my expectation is that the precious metals sector will reassert its strength – with a return to a more slow-and-steady climb likely for next week.

 

What is more exciting is what lies ahead for the miners. The strength of today's rebound in mining equities is a demonstration of “hunger” for these companies which I haven't seen since 2006. I was fortunate enough to add some shares on a pending “buy” order (which got filled before I woke up today). Hopefully other bulls were also able to use the attack by the anti-gold cabal to their advantage, as well.

 

Today appears to be another signpost that we have entered a new era in the precious metals market – an era where the anti-gold cabal is capable of nothing more cooling-off this sector (and healing it, technically) while bulls get the opportunity to open new, cheaper positions. This is the precise opposite of those previous dynamics, and a further illustration that buyers are now in firm control of this market.

 

Conversely, as the cabal tried to force their advantage today, it is they who have been caught in positions which were quickly “under water”. The less-adept “speculative shorts” who (in better times) were allies of the cabal (providing added momentum to their attacks) are now a liability to this group. It is these shorts who are now regularly getting caught in “squeezes” - which have powered gold through various resistance-levels again and again through this fall rally.

 

As the other “shorts” in this sector get hammered again and again, we are getting very close to the point where these traders are permanently frightened away from this sector (or onto the “long” side), or simply wiped-out altogether. Life continues to get much lonelier for the cabal.

]]> Fri, 27 Nov 2009 11:40:53 -0500 There was some quirky behavior in the gold market – as a consequence of the market-shock from the announcement by Dubai World that it was essentially defaulting on its debt. The first reaction of the gold market was a move up, although gold gave up those gains over the course of trading on Thursday.

 

Then there was the much more suspicious move in the gold market the day after the announcement – which (by pure coincidence) occurred when U.S. markets re-opened after the U.S. Thanksgiving. Gold plummeted over 5% in essentially the blink of any eye. It then bounced back nearly as quickly.

 

This “delayed reaction” reeks of the gold-sabotage operations for which the anti-gold cabal have become famous. However, the powerful rebound of not only the precious metals, but also the precious metals miners has provided a vivid illustration of the waning power of that cabal. Ambushing a market which was clearly caught over-weight on the long side is precisely the sort of attack which has been overwhelmingly successful in the past.

 

Those traders who got slapped-down as gold was pushed down through their stops would typically became “gun-shy” after their losses – with the Manipulators using such trepidation to either push the gold market down further, or to at least hold the market down, and prevent the exact sort of snap-back rally we are witnessing Friday.

 

What is clearly new (and unsettling to the cabal) is that this time there was no fear preventing buyers from jumping in and using this large “blip” as a buying opportunity. What is personally more gratifying for me was the bounce-back in the mining equities. As I mentioned in a recent commentary (“Gold Market Strong, but not TOO Strong”), the gold perma-bears had taken a lot of delight in pointing out that the miners had not been leveraging the gains in bullion, itself.

 

They stated the false “conclusion” that this indicated that the precious metals sector was over-extended. In reality (and as I pointed out), the fact that the miners had not leveraged the recent gains in bullion actually signified the fact that this sector was a long ways away from any significant top. If the bears had been right – that under-performance by the miners represented weakness in the sector, then we certainly would not have expected both bullion and the mining equities to rebound so powerfully.

 

As things stand at the moment, this yo-yo movement in the gold market has been nothing more than “the pause that refreshes”. Gold (and silver) has shaken-off its over-bought technical status, and faster than the mainstream talking-heads could point to “technical weakness”, that “weakness” is already past.

 

This event marks the first significant “test” of the precious metals bull market since gold blasted through the $1000-barrier for the 3rd (and final time). It has passed with “flying colours”. Meanwhile, a cash-strapped U.S. government is now pleading for U.S. banks to repay some of their borrowed money – as the total collapse in government revenues has every level of the U.S. government falling short of even dramatically lowered estimates.

 

These revenue “surprises” for the various levels of the U.S. government are exactly what we would expect in an economy publishing grossly fraudulent statistics on GDP, unemployment, and inflation. And this trend can only accelerate – given the fact that the U.S. economic “recovery” was created out of simply telling larger lies about the U.S. economy.

 

With the U.S. federal government pressuring banks for loan-repayments, this in turn, has led to speculation that the U.S. financial sector will be facing another round of massive dilution. Thus, on a day when precious metals were targeted for attack, it is U.S. markets which are looking vulnerable.

 

The aberration of a dead-cat bounce for the U.S. dollar and an up-tick for the U.S. Treasuries bubble also leave those markets poised for a steep sell-off. With everything in U.S. markets looking over-bought (and overdue for significant corrections), my expectation is that the precious metals sector will reassert its strength – with a return to a more slow-and-steady climb likely for next week.

 

What is more exciting is what lies ahead for the miners. The strength of today's rebound in mining equities is a demonstration of “hunger” for these companies which I haven't seen since 2006. I was fortunate enough to add some shares on a pending “buy” order (which got filled before I woke up today). Hopefully other bulls were also able to use the attack by the anti-gold cabal to their advantage, as well.

 

Today appears to be another signpost that we have entered a new era in the precious metals market – an era where the anti-gold cabal is capable of nothing more cooling-off this sector (and healing it, technically) while bulls get the opportunity to open new, cheaper positions. This is the precise opposite of those previous dynamics, and a further illustration that buyers are now in firm control of this market.

 

Conversely, as the cabal tried to force their advantage today, it is they who have been caught in positions which were quickly “under water”. The less-adept “speculative shorts” who (in better times) were allies of the cabal (providing added momentum to their attacks) are now a liability to this group. It is these shorts who are now regularly getting caught in “squeezes” - which have powered gold through various resistance-levels again and again through this fall rally.

 

As the other “shorts” in this sector get hammered again and again, we are getting very close to the point where these traders are permanently frightened away from this sector (or onto the “long” side), or simply wiped-out altogether. Life continues to get much lonelier for the cabal.

]]> gold silver precious metals miners Death of the U.S. Consumer http://seekingalpha.com/instablog/407380-jeff-nielson/37320-death-of-the-u-s-consumer?source=feed 37320 On June 12th , I wrote a commentary titled “The Death of the U.S. Consumer Economy”. In that piece, I detailed the two, concurrent trends which guarantee a paradigm-shift in the U.S. consumer-economy.

 

The first of those trends is the maximization of available credit. Not only is the U.S. a consumption-based economy – an inherently unsustainable economic model – but for the last decade this unsustainable economic model has become entirely dependent on an exponential increase in debt/credit. This has resulted in me labeling the U.S. a “Ponzi-scheme economy”, since Ponzi-schemes also rely upon exponential inflows of capital in order to be sustained.

 

The problem for the U.S. now (and for the future) is that not only can exponential increases in debt no longer be financed by U.S. consumers, but this same limitation also applies to all three levels of U.S. government. For the state and municipal levels of government, this means a continuing stream of lay-offs for years to come – followed by many more years of austerity. For the federal government, it has already resulted in large portions of the current deficit being “monetized” (i.e. printing money to pretend to “pay its bills”).

 

With no possibility of future growth being sustained through increased credit/debt, any genuine economic recovery requires employment growth. This brings me to the second “nail” in the economic coffin of the United States. An economy roughly 70% dependent upon consumption must also rely upon service-sector jobs to provide a majority of its employment.

 

Public sector employment is certain to shrink through the combination of a record-collapse in revenues, and exploding costs for health-care and other entitlement programs. Tax increases and fee increases are also inevitable.

 

For the private sector, the combination of a lower marginal propensity to consume, and the massive down-sizing already underway in the U.S. retail sector has created a death-spiral of fewer consumer-dollars leading to more retail sector lay-offs, leading to even less consumer spending.

 

While I try to avoid the use of economic jargon, the “marginal propensity to consume” is a critical concept for the U.S. consumer-economy. This statistic refers to the portion of each new dollar of income/wealth which is spent. For a consumer economy which is also highly leveraged with debt, the change of even a few percentage points in the MPC can literally spell the difference between an economic “boom” and economic disaster.

 

In the U.S. economy, three separate dynamics are all simultaneously at work to lower the U.S.'s MPC. First of all, there is the ever-increasing inequality of wealth distribution in the U.S. economy. In a typical capitalist society, the lop-sided distribution of wealth generally involves the wealthiest 20% of society holding 80% of the wealth (with the inverse ratio of the bottom 80% holding only 20% of the wealth).

 

In the United States, the top 20% holds 85% of the wealth, meaning the lower 80% hold a measly 15% of the wealth. This may not seem like a huge difference, however what it means is that the 80-percentile demographic in non-U.S. societies have (on average) a 33% higher standard of living. This has a large impact on U.S. consumption at both ends of the wealth spectrum.

 

It is an established principal of economics (and arithmetic) that the higher one's wealth-level, the lower their MPC. In other words, really wealthy people spend only a tiny portion of each new dollar of wealth – providing virtually zero social or economic “utility” in such individuals getting richer. Meanwhile, while the poorer members of society spend all that they have (an MPC of 100%), because they are steadily getting poorer, they simply have less money to spend every year.

 

This principal of arithmetic was already understood nearly two thousand years ago. It was at that time that Greek philosopher Plutarch wrote “an imbalance between rich and poor is the oldest and most fatal ailment of all republics”. Modern economics has simply quantified this principle by noting that the reduced consumption which is inevitable with increasing wealth inequality guarantees a less-healthy economy than if wealth distribution were more equal.

 

The second dynamic which is lowering the U.S. marginal propensity to consume is the reduction of credit available to U.S. consumers – the first time this has happened in the 40 years for which such records have been kept. The excessive reliance upon debt/credit has meant that many U.S. consumers have had a MPC of greater than 100%. In fact, for a period of two years (at the peak of U.S. bubble-insanity), the entire U.S. economy had a marginal propensity to consume of greater than 100%.



This is simply the alternative means of expressing how the U.S. economy had a “negative savings rate” for roughly two years. What makes such a statistic so totally appalling is that the top 1% in the U.S. wealth pyramid (who hold 33% of all wealth, by themselves) have an extremely low MPC. Thus for the entire U.S. economy to have a net, negative savings rate implies a large segment of the population spending 10%, 15% or even 20% more than they were earning.

 

With this historic reduction in U.S. consumer credit, there can be few if any Americans still “consuming” more than 100% of what they earn. This dramatic cap on credit guarantees another significant drop in MPC.

 

The third dynamic reducing the MPC is a voluntary reduction in consumption by the people in the middle. Those Americans who still have “discretionary income” to spend are choosing to spend less. A Reuters article provides numbers which are nothing short of catastrophic for U.S. retailers. A full 25% of the U.S. population state they have decided to permanently reduce spending.

 

While some surveys are less than convincing, there are several excellent reasons to treat this consumer pledge very seriously. To begin with, U.S. consumer debt is so grossly excessive by any/every standard in history. Reducing this mountain of debt is simply a reflection of a return to sanity. Even if those massive debts did not exist, the non-existent “savings rate” for the U.S. economy was also an aberration, not only compared to any/every other country – but also an aberration in American behavior. Statistically, one would expect many years of reduced discretionary spending as the “pendulum” of behavior swings back.

 

To counter this, the U.S. propaganda-machine has invented new “buzzwords” for the media-parrots to recite incessantly: “frugality fatigue”. This laughable invention of the propagandists presents us with the idea that after U.S. consumers have just finished the wildest thirty-year spending-binge in human history, that one year of extremely modest saving has “exhausted” them.

 

A fourth drag on consumer spending is the falling wealth of U.S. consumers. I covered part of this in a recent commentary (see “Housing Sector Mirage”). A shocking one in seven U.S. mortgage-holders are already delinquent on their mortgage or in foreclosure – and 5 out 6 of those people will end up losing their homes if previous trends hold. Obviously people who lose their homes have lost most or all of their wealth – and it will be many years (if ever) before such households spend at previous levels.

 

Equally horrific, it was just reported that nearly one out of four U.S. mortgage-holders are “under-water” on their mortgage (i.e. they have less-than-zero equity). When record-numbers of Americans are losing their homes and record-numbers have zero equity or less, this suddenly-poor society will simply have much less to spend – even when consumers finally have access to more credit.

 

I cannot discuss the “death of the U.S. consumer” without remembering to mention the role of U.S. banks in assassinating the U.S. consumer. Surely no one has forgotten how U.S. banksters extorted over $10 trillion in hand-outs/loans/guarantees – hogging more than 90% of all government resources focused on “bailing out” the U.S. economy.

 

Readers will also recall how the “leaders” of all the banks who proudly stood in line for their hand-outs promised to “increase their lending” to U.S. consumers and businesses in order to “lead the U.S. economy” out of recession. These same “leaders” are now prepared to engage in the largest bonus-orgy in corporate history.

 

The bankers of Goldman Sachs, JP Morgan, and Morgan Stanley are expected to give themselves $30 billion in bonuses – nearly equivalent to the wages of one million average Americans. A very, Merry Christmas, indeed!

 

And what about their “promise” to “increase lending” to “lead the U.S. economy out of recession”? To quote the FDIC, “loan balances at commercial banks fell at the fastest clip in at least 25 years in the third quarter” (since those records were first kept). This is quite the statement, given that lending by U.S. banks had already been falling for every quarter since Wall Street banksters made their “promise”.

 

For those optimists who believe it's only a matter of “toughing it out” for a few years before the U.S. economy regains its footing, think again. It was also recently reported that more than 50% of every new dollar of federal debt is now simply interest payments on existing debt. All of this current, massive deficit-spending is not “building the U.S. economy” on some path to future prosperity, it's simply racking up much more debt.

 

The final death-blow to U.S. consumers will be the suicidal downsizing of U.S. retailers, as was pointed out in my original commentary. Sadly, falling real consumer-spending (i.e. inflation adjusted) means that it is suicide for many U.S. retailers not to down-size. The problem is that when the sector, as a whole, all down-sizes that everyone loses – since the only means for these companies to down-size is through reducing employees.

 

The precise nature of this down-sizing has already been spelled-out: a massive increase in on-line retailing, implying a massive decrease in retail outlets. As with the U.S. manufacturing sector, when just a few companies “outsourced” their production to Asia there was a net benefit. However, once the whole U.S. manufacturing base embraced that trend, it was economic suicide.

 

For a tiny number of Wall Street denizens, this Christmas will be a party of epic proportions. However, for the vast majority of the U.S. population, it is simply another bleak holiday season – with many more to come. The U.S. consumer is dead. Any possible “resurrection” is at least a generation away.

[Disclosure: I hold no position in Goldman Sachs, JP Morgan, or Morgan Stanley]


]]> Wed, 25 Nov 2009 19:20:21 -0500 On June 12th , I wrote a commentary titled “The Death of the U.S. Consumer Economy”. In that piece, I detailed the two, concurrent trends which guarantee a paradigm-shift in the U.S. consumer-economy.

 

The first of those trends is the maximization of available credit. Not only is the U.S. a consumption-based economy – an inherently unsustainable economic model – but for the last decade this unsustainable economic model has become entirely dependent on an exponential increase in debt/credit. This has resulted in me labeling the U.S. a “Ponzi-scheme economy”, since Ponzi-schemes also rely upon exponential inflows of capital in order to be sustained.

 

The problem for the U.S. now (and for the future) is that not only can exponential increases in debt no longer be financed by U.S. consumers, but this same limitation also applies to all three levels of U.S. government. For the state and municipal levels of government, this means a continuing stream of lay-offs for years to come – followed by many more years of austerity. For the federal government, it has already resulted in large portions of the current deficit being “monetized” (i.e. printing money to pretend to “pay its bills”).

 

With no possibility of future growth being sustained through increased credit/debt, any genuine economic recovery requires employment growth. This brings me to the second “nail” in the economic coffin of the United States. An economy roughly 70% dependent upon consumption must also rely upon service-sector jobs to provide a majority of its employment.

 

Public sector employment is certain to shrink through the combination of a record-collapse in revenues, and exploding costs for health-care and other entitlement programs. Tax increases and fee increases are also inevitable.

 

For the private sector, the combination of a lower marginal propensity to consume, and the massive down-sizing already underway in the U.S. retail sector has created a death-spiral of fewer consumer-dollars leading to more retail sector lay-offs, leading to even less consumer spending.

 

While I try to avoid the use of economic jargon, the “marginal propensity to consume” is a critical concept for the U.S. consumer-economy. This statistic refers to the portion of each new dollar of income/wealth which is spent. For a consumer economy which is also highly leveraged with debt, the change of even a few percentage points in the MPC can literally spell the difference between an economic “boom” and economic disaster.

 

In the U.S. economy, three separate dynamics are all simultaneously at work to lower the U.S.'s MPC. First of all, there is the ever-increasing inequality of wealth distribution in the U.S. economy. In a typical capitalist society, the lop-sided distribution of wealth generally involves the wealthiest 20% of society holding 80% of the wealth (with the inverse ratio of the bottom 80% holding only 20% of the wealth).

 

In the United States, the top 20% holds 85% of the wealth, meaning the lower 80% hold a measly 15% of the wealth. This may not seem like a huge difference, however what it means is that the 80-percentile demographic in non-U.S. societies have (on average) a 33% higher standard of living. This has a large impact on U.S. consumption at both ends of the wealth spectrum.

 

It is an established principal of economics (and arithmetic) that the higher one's wealth-level, the lower their MPC. In other words, really wealthy people spend only a tiny portion of each new dollar of wealth – providing virtually zero social or economic “utility” in such individuals getting richer. Meanwhile, while the poorer members of society spend all that they have (an MPC of 100%), because they are steadily getting poorer, they simply have less money to spend every year.

 

This principal of arithmetic was already understood nearly two thousand years ago. It was at that time that Greek philosopher Plutarch wrote “an imbalance between rich and poor is the oldest and most fatal ailment of all republics”. Modern economics has simply quantified this principle by noting that the reduced consumption which is inevitable with increasing wealth inequality guarantees a less-healthy economy than if wealth distribution were more equal.

 

The second dynamic which is lowering the U.S. marginal propensity to consume is the reduction of credit available to U.S. consumers – the first time this has happened in the 40 years for which such records have been kept. The excessive reliance upon debt/credit has meant that many U.S. consumers have had a MPC of greater than 100%. In fact, for a period of two years (at the peak of U.S. bubble-insanity), the entire U.S. economy had a marginal propensity to consume of greater than 100%.



This is simply the alternative means of expressing how the U.S. economy had a “negative savings rate” for roughly two years. What makes such a statistic so totally appalling is that the top 1% in the U.S. wealth pyramid (who hold 33% of all wealth, by themselves) have an extremely low MPC. Thus for the entire U.S. economy to have a net, negative savings rate implies a large segment of the population spending 10%, 15% or even 20% more than they were earning.

 

With this historic reduction in U.S. consumer credit, there can be few if any Americans still “consuming” more than 100% of what they earn. This dramatic cap on credit guarantees another significant drop in MPC.

 

The third dynamic reducing the MPC is a voluntary reduction in consumption by the people in the middle. Those Americans who still have “discretionary income” to spend are choosing to spend less. A Reuters article provides numbers which are nothing short of catastrophic for U.S. retailers. A full 25% of the U.S. population state they have decided to permanently reduce spending.

 

While some surveys are less than convincing, there are several excellent reasons to treat this consumer pledge very seriously. To begin with, U.S. consumer debt is so grossly excessive by any/every standard in history. Reducing this mountain of debt is simply a reflection of a return to sanity. Even if those massive debts did not exist, the non-existent “savings rate” for the U.S. economy was also an aberration, not only compared to any/every other country – but also an aberration in American behavior. Statistically, one would expect many years of reduced discretionary spending as the “pendulum” of behavior swings back.

 

To counter this, the U.S. propaganda-machine has invented new “buzzwords” for the media-parrots to recite incessantly: “frugality fatigue”. This laughable invention of the propagandists presents us with the idea that after U.S. consumers have just finished the wildest thirty-year spending-binge in human history, that one year of extremely modest saving has “exhausted” them.

 

A fourth drag on consumer spending is the falling wealth of U.S. consumers. I covered part of this in a recent commentary (see “Housing Sector Mirage”). A shocking one in seven U.S. mortgage-holders are already delinquent on their mortgage or in foreclosure – and 5 out 6 of those people will end up losing their homes if previous trends hold. Obviously people who lose their homes have lost most or all of their wealth – and it will be many years (if ever) before such households spend at previous levels.

 

Equally horrific, it was just reported that nearly one out of four U.S. mortgage-holders are “under-water” on their mortgage (i.e. they have less-than-zero equity). When record-numbers of Americans are losing their homes and record-numbers have zero equity or less, this suddenly-poor society will simply have much less to spend – even when consumers finally have access to more credit.

 

I cannot discuss the “death of the U.S. consumer” without remembering to mention the role of U.S. banks in assassinating the U.S. consumer. Surely no one has forgotten how U.S. banksters extorted over $10 trillion in hand-outs/loans/guarantees – hogging more than 90% of all government resources focused on “bailing out” the U.S. economy.

 

Readers will also recall how the “leaders” of all the banks who proudly stood in line for their hand-outs promised to “increase their lending” to U.S. consumers and businesses in order to “lead the U.S. economy” out of recession. These same “leaders” are now prepared to engage in the largest bonus-orgy in corporate history.

 

The bankers of Goldman Sachs, JP Morgan, and Morgan Stanley are expected to give themselves $30 billion in bonuses – nearly equivalent to the wages of one million average Americans. A very, Merry Christmas, indeed!

 

And what about their “promise” to “increase lending” to “lead the U.S. economy out of recession”? To quote the FDIC, “loan balances at commercial banks fell at the fastest clip in at least 25 years in the third quarter” (since those records were first kept). This is quite the statement, given that lending by U.S. banks had already been falling for every quarter since Wall Street banksters made their “promise”.

 

For those optimists who believe it's only a matter of “toughing it out” for a few years before the U.S. economy regains its footing, think again. It was also recently reported that more than 50% of every new dollar of federal debt is now simply interest payments on existing debt. All of this current, massive deficit-spending is not “building the U.S. economy” on some path to future prosperity, it's simply racking up much more debt.

 

The final death-blow to U.S. consumers will be the suicidal downsizing of U.S. retailers, as was pointed out in my original commentary. Sadly, falling real consumer-spending (i.e. inflation adjusted) means that it is suicide for many U.S. retailers not to down-size. The problem is that when the sector, as a whole, all down-sizes that everyone loses – since the only means for these companies to down-size is through reducing employees.

 

The precise nature of this down-sizing has already been spelled-out: a massive increase in on-line retailing, implying a massive decrease in retail outlets. As with the U.S. manufacturing sector, when just a few companies “outsourced” their production to Asia there was a net benefit. However, once the whole U.S. manufacturing base embraced that trend, it was economic suicide.

 

For a tiny number of Wall Street denizens, this Christmas will be a party of epic proportions. However, for the vast majority of the U.S. population, it is simply another bleak holiday season – with many more to come. The U.S. consumer is dead. Any possible “resurrection” is at least a generation away.

[Disclosure: I hold no position in Goldman Sachs, JP Morgan, or Morgan Stanley]


]]> U.S. economy U.S. retail sector U.S. propaganda