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  • G20: The New Ideological Divide [View article]
    I made this point yesterday and I will repeat it today: economics is part of a double helix with politics and the two "strands are inextricably linked". Any serious discussion of economics must take place in the context of the political backdrop and we know the current administration is generally hostile to the interests of business and wants to reshape the economic landscape along the lines of progressive ideals.

    Aware that small businesses, young businesses and businesses rooted in technology have led us out past recessions what incentives do these businesses have to invest financial and entrepreneurial capital to improve themselves and the larger economy? Healthcare reform will be an economic train wreck and other reform will only add to the damage, ultimately leading to higher taxes to pay for new and previously mandated programs. There are few incentives to invest when facing higher taxes and looking at a warped future while feeling marginalized, disenfranchised and stripped of constitutional guarantees.

    In a $14 trillion economy with 25% of industrial capacity rotting while sitting empty, what should we expect from $600 billion or so of stimulus spending? Not much because the spending will simply slip through the gaping holes of excess and only boost the work week an hour or two and maybe notch-up temporary employment. We could easily spend another $500 billion while going further into debt and it would not do anything beyond prolong the inevitable.

    Like it or not, the markets will force us to address the imbalances and excessive debt levels undermining economy our economy. This process will be painful but, unfortunately, is essential as we have simply reached the limits of borrowing to finance consumption. Even the "stimulators" must realize the incremental return in the form of economic activity on expanding debt is approaching zero and could turn negative. In addition to crowding out growing debt curtails consumption among those who reason that higher taxes are in the offing as, at some point, the debt must be retired. This has been confirmed by academic studies which suggest when a nation's debt exceeds 90% of its GDP its growth potential becomes structurally impaired. So further impairing our growth potential is stimulative?

    Lastly, we need to undertake a mix of policies with 1) real financial reform, 2) writedown of toxic assets 3) appreciation that tax adjustments are three times as potent as spending adjustments and 4) a more refined approach to counter cyclical fiscal spending which takes into account the benefits of investment directed spending over consumption driven spending.

    Keynes, himself, would prefer investment directed spending over other types as he envisioned interventionist spending being temporal and yielding financial benefit to the state to retire the debt used to fund the intervention. To minimize the influence of special interests an apolitical panel could be created and charged with developing a quasi national industrial policy and given responsibility for investing public funds according to policy priorities and strict criteria to ensure national interests are served, not special interests.
    Jun 29 06:04 AM | 17 Likes Like |Link to Comment
  • A Busted 'Bailout and Stimulate' Formula [View article]
    Excellent article higlighting a number of points that should be mentioned:

    1) Fiscal policy can incorporate tax cuts or increased spending and we, in the interest of steering money to political ends, have predominantly chosen spending when many believe tax cuts offer higher fiscal multipliers.

    2) Within fiscal spending, it's known some categories of spending offer higher fiscal multipliers (bridges, highways, ect) than others (transfer payments) yet we persistently choose to spend on low grade efforts. Combined with (1) above we consistently choose the worst of the worse for political ends yielding the lowest fiscal benefits.

    3) There has been an arument around that higher deficits and debt can cause a contraction in spending out of a fear higher taxes will be levied to pay for the expanded debt; there is new fear simply related to the level of debt which could further restrain spending and invesment. Last month there was a sudden increase in the rate of savings.

    4) Once public debt reaches a certain level......say 90% of reduces structural growth by 1% point or more. We will cross that threshold by 2012 or earlier, making it very difficult to invoke the Keynesian call for additional stimulus to promote growth under the promise that the additional stimulus will be withdrawn upon arrival of growth. This an empty promise as now the additional debt will impose structural limits to additional growth.

    5) Yesterday Pimco declared a Keynesian end for most countries as we have reached debt levels that capital market are not willing to tolerate.
    Jun 9 11:22 AM | 17 Likes Like |Link to Comment
  • There's a Slow Train Coming [View article]
    Good point Sonia and I would add that a majority of Americans are scared to death about the deficit and our constantly expanding debt but this does not deter the administration from pushing through healthcare reform that will prove to be a vastly more expensive program than expected. Yet, in the face of a slumping economy, work is underway on a second stimulus package that is likely to mirror the first and accomplish nothing more than the first but leave us further in debt. Whether out of a general fear or a fear of higher taxes to offset levels of new borrowings, consumer confidence will eventually collapse and consumers will retrench, further straining the economy. I don't think there has ever been a president so tone deaf.
    Jun 6 11:18 AM | 17 Likes Like |Link to Comment
  • Can We Grow Our Way Out of Debt? [View article]
    This highly fatigued economic Zeitgeist, widely embraced by Keynesians (used loosely) and others that prefer hope and illusion over reality, which offers the possibilities of endless debt accumulation through accelerating economic growth beyond the pace of debt acquisition has been a failure of epic proportions. In 1980 debt to gdp was around 40% and today it is inches away from 100%; it's only a matter of time before the fault lines in Europe reach under the pond and subject our capital markets to much needed restraint and discipline.
    May 20 11:54 AM | 17 Likes Like |Link to Comment
  • Debt Levels Do Matter [View article]
    What was worse, the Federal Reserve in the Greenspan and Bernanke years facilitated the debt increases because the Fed never took away the stimulus fast enough, and offered stimulus too rapidly. This led to a culture of unbridled debt and risk-taking.


    In policy terms this reflects the core issue: the Fed is not an independent institution. It is owned by the banks and is subject to poltical influence as well as seen in Bernanke lobbying congressional members for his renomination. Accordingly, its policy is highly biased.
    Feb 12 09:34 AM | 17 Likes Like |Link to Comment
  • What Will Happen When the Fed Stops the Music? [View article]
    I think things are going to get rather messy.

    Japan was able to self fund the lost decades through high internal savings and for the most part the rest of the world was OK.....though there were brief periods where crises overlap.

    Today, though, its the entire G7 (Germany runs a surplus), states with the EU, Iceland and some of the Baltic states that need to secure outside funding. There are not enough reserves and surpluses to fund th antipated requests, resulting in the now familiar dilemma: cut spending or print money.

    Since governments have proven themselves spineless and short sighted, look for the ECB and the US to fire up the presses while China, the other BRIC's and other surplus countries are petitioning for global monetary reform.
    Jan 17 08:57 AM | 17 Likes Like |Link to Comment
  • Japan to the U.S.: 'We Don't Want to Exclude You, But...' [View article]
    Hatomaya and Wen are in increasingly disillusioned about the direction of the dollar and its likley prospects given our irresponsible fiscal tendencies. In one of the last meetings Wen asked more about healthcare reform than anything else, revealing a keen understanding of our problems.

    To benefit from our defense umbrella and protect reserves invested in the dollar, the Japanese are likely to pursue trade structures that preclude US participation while, disengenuously, assuring the world that ties to the US remain firm.

    Before abandoning the ship, both China and Japan would like to have something more concrete in place to replace the dollar; in the meantime, they will reduce exposure through diversifying reserve holdings, minimize additions and, simultaneously, work towards a new reserve currency while placating the US.

    They want to keep their options open.
    Sep 16 09:34 AM | 17 Likes Like |Link to Comment
  • Will Chimerica's Demise Take Down Global Economy? [View article]
    The basic model is broken: the US needs to spend less and invest more; the Chinese need to save less and spend more. What we shared in the past is unsustainable with too many imbalances.

    The Chinese are struggling as desparately as we are and many of the statistics being released in China are highly misleading; contrary to what is being reported, Chinese consumer spending as a fraction of GDP is declining. At the moment they are ever more dependent upon state driven invesment, some of which is being directed into building surplus manufacturing capacity.

    They cannot transition to a consumption driven economy any more easily than we can transition to an investment and export driven economy; there will be painful adjustments. Current tensions identified by the author are symptoms of these underlying stresses and China's determination to be something more than a source of low cost labor to the western world and evolve into a super power in its own right.

    What distinguishes the two countries is that China has an idea as to what direction it wants to move towards; the US bogged down in deleterious debates as to how to share an ever shrinking economic pie. China will eventually eclipse the economic power of the US, it's only a matter of timing. Along the way, there will be natural frictions as China and the US rebalance their relationship.

    Sep 15 06:39 AM | 17 Likes Like |Link to Comment
  • Eliot Spitzer on Goldman Sachs and Matt Taibbi [View article]
    As a preeminent member of the ruling oligarchy, Goldman no longer has to compete with other trading houses like Lehman Brothers and Bear Stearns and, to a lesser extent, Merrill. There is clearly less competition on the Street.

    There is a huge difference between acting a Temporary Liquidity Provider and relying upon a sophisticated HFT platform and simply recycling pieces of paper and making a 1/4 of a cent on each share traded versus playing a constructive role in assisting companies in raising and investing capital.

    In the absence of the corridor between Treasury and Goldman, I would say more power to them but it is clear that they enjoy a special status much as the Medici family bank did in Florence in the 12th century. They are clearly the annointed ones with the growing realization that politics and money are self reinforcing.
    Jul 15 08:59 AM | 17 Likes Like |Link to Comment
  • Why Gold Is Losing Its Shine [View article]
    Whether you buy gold today or simply watch deserves respect if for no other reason it represents a store of value that cannot be debased through political decisions. Here is some interesting data to better frame the perspective of looking at gold:

    Gold’s Percentage Rise in the Last Bull Market. What if gold in this bull market repeats the percentage rise in the last bull market? In the 1970s gold rose from $35 to $850, a factor of 24.28. Our low in 2001 was $255.95. Multiply that by 24.28 and you get a gold price of $6,214 per ounce.

    U.S. Gold Holdings to Money Supply: The M1 money supply consists of currency and checkable deposits. The U.S. government currently holds 286.9 million ounces of gold. If the government were to make each dollar redeemable by the amount of gold it possesses, we’d arrive at the following price for gold: $1.569 trillion ÷ 286.9 million oz. = $5,468.80 per ounce

    Gold/Dow Ratio: The ratio was about “1” when gold peaked in 1980, meaning the Dow and gold were the same price. To restore that relationship at today’s stock prices would mean when the Dow is at 6,626, gold should be at $6,626/oz. Of course, we think it likely that the Dow will get a lot lower before gold peaks. But even if it drops all the way to 4,000, that would imply a gold price of $4,000/oz.

    All the Money in the World vs. Gold Reserves: If the public eventually sees the paper game being run by the central banks for what it is, governments will be forced to back their currencies with gold (and perhaps other tangibles like silver). Assuming they had to go into the market and buy the gold needed to restore faith in their currencies, the numbers might look like this: Total central banks reserves (including gold holdings) = $4.8 trillion, divided by 929.6 million ounces total gold reserves held by all official institutions that issue currency = $5,246 gold price.

    U.S. Gold Holdings to U.S. Foreign Trade Deficit: The size of a country's deficit or surplus would be of no consequence if all currencies were convertible into a fixed amount of gold. However, the dollar is increasingly considered a hot potato, and when the trade balance reverses, as it must, dollars will flow back to the U.S. and fuel domestic price inflation. Based on the cumulative trade deficit of $9.13 trillion (up from $6 trillion since June ‘07!) and U.S. gold holdings of 286.9 million ounces, the corresponding price of gold would be $31,822 per ounce.

    U.S. Gold to U.S. Government Liabilities: Finally, the GAO (Government Accountability Office) calculates an income statement and balance sheet for the U.S. government. As you’d suspect, it is dominated by future liabilities for Medicare and Social Security. What if they had to be backed by the supply of gold? Official U.S. government liabilities now ring in at an incredible $55.2 trillion. To make good on that would require a $192,401 gold price.

    May 4 09:43 AM | 17 Likes Like |Link to Comment
  • Santelli's Chicago Tea Party: The Quest for Our Nation's Soul [View article]
    Economic systems tend to evolve and ours has reached a tipping point.......a point at which government has determined it should intervene and preempt a market driven unwinding of asset bubbles, excessive consumer spending and credit excesses.

    The governemnt was correct to intervene but the manner in which it has intervened will impose great costs upon us. The most obvious cost is the publicized cost of all of the policy initiatives, variously estimated to be around $8 trillion committed.

    The steepest cost, though, will be in future tax hikes; the national division between taxpayers and beneficiaries; the loss of individual accountability and responsibility; loss of counter party faith; further encroachment of the state in private affairs; weakening of contract law; expansion of court powers; and the dampening of the rugged individualism that has made this country what it is.

    I don't know how many Rick Santelli's will be around in thirty years or so.

    Feb 22 12:59 PM | 17 Likes Like |Link to Comment
  • How the Crash Will Reshape America [View article]
    With the massive employment reductions in the financial sector, the reshaping has started and the announcement that the FDIC has seized four banks suggests a picture of streamlining and consolidation.

    We also know that regulatory oversight will be increased and is likely to be overdone, increasing the appeal of London and Zurich. Incremental growth in global financial services is likely to occur outside of the US.

    Within the US, the deterioration of the rust belt will continue and the plight of states like Michigan and Ohio will only worsen. Across the country, though, there will be a massive downsizing of the infrastructure built to encourage and facilitate consumer spending sustained by debt accumulation.

    As the consumer delevers, many malls and strip centers will fail and the number of coffee shops, auto dealers, bank branches and retail outlets will be reduced.

    Feb 14 07:49 AM | 17 Likes Like |Link to Comment
  • Economy in Danger of Full Stall [View article]
    Written without prejudice and based upon facts, your article is a breath of fresh air.

    The Philly Fed ADS business conditions continues to limp along at below average conditions, much like the Chicago Fed national activity index, while the UCLA pulse of commerce index has now declined in four of the first five months of 2011, and in eight of the past twelve months.

    It is clear that the economy is idling and growth remains a struggle which is why many market economists have marked down estimates of second quarter to the 2.0% range, well below the 2.5% required to stabilize the unemployment rate.

    Over the next twelve months many economists see the economy accelerating modestly but none identify credible catalysts. Gary Schilling thinks we’re approaching a second recession because of low job growth, falling real incomes and the weight of continuing declines in home prices.

    From Marketwatch: A further 20% decline in home prices would raise the percentage of homes worth less than the value of their mortgages to a stunning 40%, from the mid-20% range now. Shilling estimated it would also cut homeowners’ equity to a mere 8% of total home values, from 19% now and 50% in the early 1980s. Consumer spending will collapse.

    Longer term, there is little reason to be optimistic about our prospects when we face continuing deleveraging, an aging population, an expanding government footprint, a concentration of personal incomes with an eroding middle class, heightened global competition and unsustainable deficits and debt.

    These are macro structural constraints on growth; not just headwinds.
    Jun 26 09:28 AM | 16 Likes Like |Link to Comment
  • The Subprime Debacle, Act II [View article]
    John's weekly letter has been redacted and in its original version the following is offered:

    It is The Subprime Debacle, Act 2. It is NOT the mortgage foreclosure issue, as serious as that is. I seriously doubt it will be contained, as well. Could the confluence of a bank credit crisis in the US and a sovereign debt banking crisis in Europe lead to another full-blown world banking crisis? The potential is there.

    Largely based upon the writings of Chris Whalen of Institutional Risk analytics, I have never believed the banking system to be sound; the stress tests were political and economic theater designed to enable the banks to raise additional capital without addressing the underlying problems of toxic assets.

    Many believe we are only 20% to 25% through the foreclosure process and recent events will force regulators to declare many large, prominent financial institutions as insolvent. The failure of the Obama administration to deal with solvency issues during 2007 to 2009 period only means they will be dealt with later.

    The banks are still carrying unreported losses; the issue is not whether the loss's reporting the loss. The impending operating collapse of a number of the nation's largest banks will serve as a catalyst for something like the RTC which will be tasked liquidating insolvent institutions and finally deflating the subprime bubble.

    We can rail against the banks and banksters, but all of this happened under the watch of the Fed, congress and various regulatory bodies possessing sufficient authority to intervene and check the unfolding corruption.
    Oct 18 07:03 AM | 16 Likes Like |Link to Comment
  • Why Aren't Equities Selling Off More Significantly? [View article]
    I think what we are seeing is an intense battle between corporate earnings, which have remained high, and deteriorating macro economic fundamentals.

    But corporations have not acted upon higher profits through expanding investment, suggesting uncertainty. And consumers continue to delever and postpone discretionary purchases.

    If the economy continues to weaken and analysts downgrade the outlook for corporate earnings, the market will likely correct violently.
    Sep 3 08:29 AM | 16 Likes Like |Link to Comment