Quote of the Day

"Do this. Don't do that. Stay back in line. Where's tax receipt? Fill out form. Let's see license. Submit six copies. Exit only. No left turn. No right turn. Queue up and pay fine. Take back and get stamped. Drop dead— but first get permit. "

-Robert Heinlein, The Moon Is a Harsh Mistress

Great Post From the Inner Workings Blog

Dave’s Top 10 Reasons the World Isn’t Coming to an End

by David Goldman

 

Japanese-style stagnation, not economic collapse, is the most likely scenario for the US. Harrisburg, PA and Greece may go down the drain (and maybe even California and New York City and Illinois), but that’s not the end of the world. It’s just the end of them.

10) China’s controlled growth deceleration is doing reasonably well, according to Cantor Fitzgerald’s Asia strategist Uwe Parpart, my old Bank of America colleague.

9) China’s banks may be choking on bad loans, but China’s massive foreign exchange reserves can cover the problem out of petty cash and rounding error.



8) Southeast Asia continues to grow, with local stock exchanges up about 20% year to date.

7) India is doing well. Add up these first four items and half the world’s population is doing just fine.

6) Europe’s economic problem is less important than it seems because “Europe” is no longer the relevant entity. Germany is decoupling from France and the Club Med countries and shifting its focus to China and Russia.

5) Russia isn’t doing badly, thanks to 12 million foreign workers from Turkey and the Turkic former republics of the Soviet Union which have solved its labor shortage, while

4) Turkey is doing well exporting labor, construction services, and manufactures to Russia and the Arab world while acting as a hub for Russian oil.

3) Retirees around the world are hard pressed to find investments that yield enough to pay for their retirements, but it’s an ill wind that blows nobody good: the extremely low yields on long-term debt that generate a $3 trillion deficit for US state and local governments also benefit capital-intensive industries. It’s not a wash, but it’s not a washout, either.

2) Irresponsible as US monetary policy may be, there’s no alternative to the dollar, and there will not be for some time (I own a decent amount of gold in various forms in case I’m wrong about that) — so the US can get away with huge deficits for quite some time.
But the number one reason that the world isn’t coming to an end is –

1)Barack Obama! He’s cooked politically. He’s practically a lame duck. Gridlock in Washington will prevent this dreadful administration from doing any more damage. And that’s good news.

That said, it’s not the end of the world — it’s just the end of you, if you’re one of the 6 percent of the US population reaching retirement age during the next ten years, or if you’re a public employee counting on a pension, or run a small business. Life will go on in these United States, drearily. But don’t expect a great cataclysm to put you out of your misery.

The equity risk premium will remain stupidly high for reasons detailed in the link. But there’s no reason for stocks to crash, that is, for the equity risk premium to get even higher than it is now.

Housing Has a Long way to go

From Zero Hedge:

On one end, you have the destruction left over from the extinction of US auto manufacturing. On the other end, you have PIMCO. And inbetween the two, there are 294 home markets, which make up the exponential curve of US real estate prices. It is not surprising that the non-normal distribution in home prices follows quite closely the Talebian extremistan distributions expected (even though the last word is an oxymoron in this context) out of modern day markets. We wonder which end of the curve the President has got his eyes focused most on these days for "excess efficiency" retention purposes.

According to the latest Coldwell Banker home listing report (link), the richest people in America reside in the following cities, which boast the following average home prices:

1.Newport Beach - $1,826,348
2.Palo Alto - $1,479,227
3.Rye - $1,325,500
4.San Francisco - $1,325,103
5.La Jolla - $1,210,300
6.Greenwich - $1,195,614
7.Wellesley - $1,080,458
8.Pasadena - $1,043,683
9.Honolulu - $1,026,821
10. Santa Barbara - $1,024,661

Alas for every market boasting an average home price over $1MM (ten of them), there are citis on the other end of the spectrum. And using the completely arbitrary cut off metric of $250,000, there are 145 markets whose homes cost less than that particular magic number, lef by the following:

1.Detroit - $68,007
2.Grayling - $84,625
3.Sioux City - $85,967
4.Cleveland - $87,240
5.Muncie - $100,314
6.Norfolk - $107,814
7.Kansas City - $112,449
8.Canton - $114,325
9.Port Huron - $116,267
10. Topeka - $116,343

At least Detroit is at the top of something. As is the broke state of California - with 6 of the 10 most expensive markets residing in the Golden State. We dread to think what will happen once the state's broke administrators realize how much wealth could be extracted from local housing if only they could collect a liiiittle bit of the net worth of each home (assuming said home is not already underwater on the debt it is pledged to).

Another Epically Good Post By Karl Denninger

From Market Ticker (The Folly Of Investing Today):

Investing is all about trying to determine a longer-term direction for the market such that risk and reward align in some meaningful way.

Yesterday, on Blogtalk, I stated that I was pulling all of my long-term investments that were market-related, and for an indeterminate time forward I would be only short-term trading this market.
That deserves an explanation, and toward this end, I would like to present the following 10 year weekly chart.



The regular "trace" is the S&P 500 price.  The white trace is the 10 year Treasury yield as a comparative.

You need to pay attention to this.

"This time it's different" is often said.

It is almost always wrong, and believing in it will almost always make you broke.

Here's reality folks.  Over the previous 10 years the TNX has never declined meaningfully without the S&P 500 following it, and declining to near or below it on a comparative basis.
The TNX almost always leads on declines too, sometimes by as much as six months.

Well, it's been six months.

In 2007, the TNX peaked in late June, after which it began a dive.  The market peaked in the middle of October of that year at 1576.  The decline essentially reached the comparative bottom.
Now the TNX has peaked the first week of April of this year, and is quite close to the March 2009 lows.  Yet the S&P, after it took a swoon, has recovered.

Exactly as it did in 2007.

We all know what came next.

The same thing happened in 2000, when the market peaked and fell apart.  Again, the TNX led.  It in fact peaked almost exactly at the end of the year in 1999. Three months later "it" began.
The TNX move today, as I outlined in Ticks in real-time, broke a triangle formation that should have moved higher.  That was a continuation pattern.  Instead, it broke the wrong way - hard - even before The Fed announcement.  After The Fed announcement the move was accentuated dramatically.


This is not a sign of "improvement" nor is it a sign to "buy stocks", as Cramer claimed today after the FOMC announcement.  To the contrary.  It is a strong signal to sell everything and get the hell away from the stock market.  It is an indication that the market should, if it follows past precedent, decline by as much as 30%, and perhaps more.

The market usually leads the TNX when it bottoms and the market heads higher.
The TNX always leads the market when it declines.
The 2yr is at all time record low yields.
Lower than during the decline in 2008 and 2009.
This strongly implies that the March 2009 "666" low in the S&P 500 is NOT a "generational low", AND IT WILL IN FACT BE BREACHED.

The bond market is very, very rarely wrong folks.  When it disagrees with equities you're a fool to believe the equities, unless of course you hate money.

This has always been true, and it will always be true.

The market is "betting" that Bernanke will come in with more "Quantitative Easing", or even better, that it can force Bernanke to implement more "Quantitative Easing."  Japan in fact did this, and has continued to do so.

Where was the all-time high in the Nikkei 225, and where does it trade now?  Did it ever get back to those highs?

No.

Does Japan have a massive foreign account deficit?  No - they have a foreign account surplus.  Their debt is owed to Japanese - not to foreigners, as ours is.

"Quantitative Easing" is a scam.  It's yet another sop and fraud to allow the government to deficit spend "allegedly" without consequence.  It covered $1 trillion of deficit spending the last time.  If they do come in again all they will do is cover another $1 trillion in deficit spending by the government, while your actual disposable income in terms of goods and services will see yet more declines, just as occurred from 2000-2010.

That's all folks.

The "scam" part of it is that there is no way The Fed can ever reduce it's balance sheet once it does
this, because to do so the government will have to decrease spending by an equivalent amount to that "eased."  It will never do so.  Not voluntarily, anyway.  Gold is moving higher on the bet that the attempt to "allow" continued government spending will fail and ultimately the government will be forced to default (either literally or through massive unsterilized money printing that destroys the currency.)  I don't think that will prove correct - I think our foreign creditors will pull our credit card first.  But that's what Gold is saying, and if Gold is right, then America as a nation is finished, and our government will eventually dissolve either into outright tyranny or civil war and you will be THROWING your gold at people to defend yourself.

The only way The Fed can "fix" the market and economy in the intermediate term is to raise rates.  That is, remove liquidity and force rates higher.  Doing so will cause the TNX to rise along with the rest of the yield curve. 

It will also shut down the Federal Government's deficit spending binge immediately as they will not be able to fund both that binge and the (higher) interest payments on the debt.

Bernanke is not going to do it.
Not now, not ever, unless he is forced by external events, and I believe eventually he WILL be. 

Unlike Japan we cannot play this game as they did, simply because of our foreign account deficits.  Japan got away with it for as long as they did for that reason, but even their capacity to do so is becoming strained.

The simple truth is that Bernanke can't pull liquidity at the present time because the government is spending all of its tax receipts paying for entitlements.

Even if the economy "recovers" he still can't do it because doing so means that interest expense would more than double, and the government doesn't have the money now and won't even under a rosy economic recovery scenario.

This is an environment in which it makes sense to own stocks as investments? 

The hell it does.

This is a classic "death spiral" situation and equity valuations are in a severe bubble as a consequence of all the government "cheese", despite "appearing" to be "cheap."

Bernanke has bricked himself into the outhouse and he knows it.  Thus, all the "soft threats" to "quantitative ease" and all the screaming from both the left and right for yet more of it - both sides know exactly what sort of box they're trapped in, and it's a box of their own design.
Oh sure, there can be short-term pops in the market.  They might even last months.  There could even be parabolic moves upward.  The Nikkei has had several of them.

But you cannot invest in them. 

You can trade them, and if you have the time and patience to do so in a dispassionate fashion then have at it, but you cannot invest in equities, nor can you buy any coupon (bonds) with any sort of meaningful duration.

If you do, you will ultimately be destroyed.

Those pension funds and other investors who are "reaching for yield" and "reaching for risk" at the present time are making the biggest mistake of their lives.  It is inevitable that this strategy will fail and when it does what you formerly thought was "safe" - whether it be your pension, your Social Security, your Medicare, your kid's prepaid college education - all of it will be gone.
This preoccupation with Bernanke's folly is not only unhealthy, it is certifiably insane.

The TNX does not lie folks.

It has not in the past - not even when "Easy Al" was running the joint and handing out money like candy.  Nor has it this time, with Bernanke doing the exact same thing Easy Al was doing.
Policies haven't changed and until they do neither will market relationships.
Act as you deem best, but ignore the bond market at your considerable peril.
It is rarely wrong.

The Biggest Issue of 2010, In One Chart

From the Political Calculations Blog

If you were asked to produce a single chart illustrating the biggest single political issue in America today, what would it look like?
We're taking on that challenge today. Here's what we came up with:
In this chart, where we've graphed the trajectory of the total spending of the federal government with respect to the median household income in the U.S. for the years from 1967 through 2009, we see that the U.S. federal government's spending today has decoupled from the primary source of income that is required to sustain it.
Worse, it has literally "gone vertical" during the last two years.
In mathematical terms, that's the sort of thing you see when you divide any number by zero. Applied to the chart above, that means that the relationship between the change in total government spending and the typical income earned by an American household from year-to-year is now "undefined."
In practical terms, that means government spending has become completely disconnected from the ability of the typical American household to support it. And until this skyrocketing spending growth is arrested and reversed, we suspect that government spending has become disconnected from the ability of any American household to support it.

Data Sources

White House, Office of Management and Budget. Historical Tables, Budget of the U.S. Government, Fiscal Year 2011. Table 3.1 - Outlays by Superfunction and Function: 1940-2015.
U.S. Census. Table H-5. Race and Hispanic Origin of Householder -- Households by Median and Mean Income (1967-2009).

Fundamental Investors Should Fear Inflation, Not Deflation

Just a great concise view on the prospects of inflation in the future. 

Fundamental Investors Should Fear Inflation, Not Deflation

Submitted by Rich Toscano and John Simon on September 13, 2010 - 11:05am.

Summary

• While continued low inflation or another bout of price deflation are both possible, there are several factors -- none of which require an economic recovery -- that could prevent deflation or even cause inflation to surprise to the upside. 
  
• In the event that deflation does take place, we believe it will be met with a powerfully inflationary policy response.  As a result, any foray into deflation will likely be relatively brief.
  
• Any deflation-fighting policies enacted will further strengthen the already robust, fundamentally-driven case for a significant eventual loss of dollar purchasing power against things that people need to buy.
• Rather than speculating on inherently unpredictable short-term events, we prefer to own a diversified basket of investments that stand to benefit from our high-confidence, fundamentally supportable long-term forecasts.
  

Definitions

In this article we employ the standard usage of the terms "inflation" and "deflation" as protracted changes in the aggregate price level of consumer goods and services. Some analysts describe changes to the money supply, system credit, or asset prices as inflation or deflation.  These are all important factors that exert an impact on general consumer price levels, as we described in a previous article on the mechanisms of deflation, but we think it only confuses matters to use the same term to describe multiple phenomena.  For this reason, and because this article concerns itself primarily with the purchasing power of US dollars, we will stick with the most commonly accepted definition of inflation and deflation as changes to consumer prices.

Neither Deflation nor Continued Low Inflation Are Certainties

Our monetary and political system is so biased towards inflation that it took an unprecedented private sector credit collapse -- along with the attendant financial market panic, severe economic downturn, and energy price crash -- in order to cause just six months of CPI deflation back in 2008.

The implosion phase of  private sector deleveraging is already behind us.  We do believe that a credit bubble still exists, but that it has moved to the government debt sector.  As we will discuss below, a crisis in government debt would not be deflationary in the way that the private sector credit collapse was.  So it is far from assured that there will be another wave of deflationary force sufficiently massive enough to overcome our systematic inflation bias and push us into outright deflation.

Meanwhile, there are several potential circumstances that could overcome the current economic weakness and continued (though much slower than late 2008) debt deleveraging that are both currently keeping inflation low:

-- More quantitative easing.  At the last Federal Reserve policy meeting, it was ordained that the proceeds from maturing mortgage-backed securities and bonds (purchased during the prior round of quantitative easing) would be rolled over into purchases of US Treasuries.  This policy move put to bed any talk of an "exit plan" for the Fed's wildly stimulative monetary policy.  It also sent a signal that the Fed is willing to use quantitative easing ("QE" -- a fancy term for the direct creation of new money in order to buy assets) not just as a crisis measure but as an ongoing policy tool.

This latest move takes place at a time when inflation is still positive and the stimulus-driven recovery, while feeble and getting weaker, is still somewhat intact.  More quantitative easing could well take place if the current lull continues, but in our opinion, QE2 would be almost a sure thing if the economy were to take another leg down or the CPI were to start dropping. 

The first round of QE appeared to help put a fairly quick end to CPI deflation, but there are too many factors involved to be certain of causality.  Still, logic dictates that if QE causes new money to be created and circulated, prices of at least some items will go up more than they would have.  In addition to increasing the amount of money being circulated, quantitative easing could also cause a loss of confidence in the dollar -- also a potentially inflationary outcome.

The money created by QE1 tended to just sit in reserves, so it did not get into general circulation in sufficient amounts to create much overall CPI inflation (although one could argue that it was sufficient to forestall further deflation).  But that need not be the case with QE2.   If the Fed monetizes US Treasuries, then the newly created money being supplied to the government can be disbursed to consumers via fiscal stimulus measures (see next section).  If that doesn't work, the Fed could monetize other assets or make purchases from non-banks in order to get the new money into wider circulation.  While not specifically quantitative easing, the Fed could further widen monetary circulation by directly granting loans to private parties.  The options available to the Fed are many, and the Fed has both stated and demonstrated that it is willing to use non-standard policies to boost inflation.

Another round of QE seems likely if the current stagnation continues, almost assured if we actually dip into deflation again, and could very well head off deflation or even cause a surge in inflation.  Just based on the possibility of further QE alone, we'd be very hesitant to declare future low inflation or deflation a sure thing.

-- More fiscal stimulus.  Unemployment is stubbornly high, voters are unhappy with the weak economy, and high-profile economists are screaming that another Great Depression is guaranteed without huge further stimulative efforts.  Under these circumstances, it's not unrealistic to expect more fiscal stimulus.  If we were to dip into actual deflation again, the case for increased stimulus would become stronger still.

Scattered mentions of austerity pop up here and there, but in most cases we believe that this is just empty electioneering.  The reality is that few politicians are willing to be the ones to force meaningful belt-tightening, especially should they find themselves in the midst of a deflation scare or serious economic downturn.

More stimulus is likely at some point, but given the widespread public bitterness towards Wall Street, future spending will probably not be aimed at propping up the financial industry.  Instead, the next round of stimulus is likely to target jobs, wages, and general spending within the economy.  Such spending programs would be more likely to stoke inflation than the prior bank-bailout stimulus.

-- A falling dollar.  There is a widespread belief that inflation can't take place in the absence of rising wages, but this is not the case.  A decline in the foreign exchange value of the dollar could drive up import and commodity prices for Americans, causing a loss of dollar purchasing power even in an environment of stagnant wages.

Currency-driven inflations against a backdrop of (often extreme) economic weakness have been quite common historically, so we are puzzled as to why this possibility is completely ignored by most analysts.

A currency-driven inflation would likely not consist of an across-the-board increase in prices.  Prices of items affected by exchange rates, such as food, energy, and imported goods would rise even as items that weren't affected as much by exchange rates -- notably, housing -- stagnated or declined.  The price indices, averaging out all items as they do, might not even look like they were rising much, but this would feel very much like inflation as people would find that their money was losing purchasing power against the things that they needed most.

A sufficiently large dollar decline could additionally undermine confidence in the currency, leading people to exchange their dollars for more reliable stores of value and driving prices up further.

-- A US government debt crisis.  We believe that a crisis of confidence in US government debt at some point is a high-probability event.  The reason, in very brief, is that the US has amassed enough foreign debt that there is no politically feasible way to pay it off in real terms. Eventually, we believe, our creditors will come to understand this reality and will begin to price it into our debt.

A crisis in Treasury debt would look very different from the deflationary private-sector credit bust of 2008.  Back then, Treasuries and the dollar were the so-called "safe havens" to which panicky investors fled.  If the US government's solvency came into question, that safe haven status would be lost and investors would likely be clamoring to get out of the very same assets that they piled into in 2008.  A resulting flight out of US dollars could have the inflationary effects described in the "falling dollar" section above.

The inflationary potential would likely be exacerbated by the belief -- probably correct -- that the Fed would monetize Treasuries in order to keep a lid on rates, thus substantially increasing the money supply.

The timing of a crisis in US sovereign debt will be driven more by crowd psychology than by anything else, so we don't think it's possible to predict ahead of time when it will take place.  But we believe that something like this will occur, that it is likely the next big crisis that our nation will have to face -- and that it has the potential to be highly inflationary.

-- Rising commodity prices.  A steep drop in the dollar's value would not be required to drive up prices of energy, food, or industrial materials.  Increased economic activity in foreign countries (even if US did not participate) could lead to rising commodity prices -- as could the gyrations of the markets, which we've clearly seen can often be completely unpredictable in the short term.   In spite of the lack of a robust recovery in the US, prices of many commodities have been surging lately.

None of the potentially inflationary outcomes listed above requires robust economic growth to take place.  In fact, some of them -- quantitative easing, fiscal stimulus, and a government debt crisis -- are more likely in the absence of an economic recovery.  A stronger recovery would likely cause more inflation as a result of increased bank lending and consumer spending, but a recovery is by no means a prerequisite for inflation.

Any of these outcomes could do more than just offset the deflationary pressures in the economy and keep us from dipping into deflation.  Depending on their magnitude, they could also cause a fairly serious increase in inflation, at least in the goods that Americans most need.  Continued low inflation -- which many analysts consider to be guaranteed -- is almost as far from being a sure thing as outright deflation.

Any Deflation Will Sow the Seeds of Its Own Demise

The US government is able and willing to do whatever it takes to prevent a serious deflation.  This conclusion is so self-evident that we don't even understand why it's a matter of debate.

We very thoroughly dealt with this topic in an article we wrote at the depths of the deflation panic in January 2009, so we aren't going to rehash it here.  We will just note that right around the time the article was written, the government intervened with even more massively inflationary policies and the price deflation soon came to an end.  Both ensuing policy and the results of that policy have overwhelmingly supported our thesis that the government can and will head off long-term price deflation.

If we were to experience another round of deflation at this point, the government would surely intervene with a similar if not even more dramatic policy response.  And to the extent that didn't have the desired effects, the government would step up the inflationary policy until something succeeded. 

Such policies work with a lag, so it's possible that prices could deflate for a while.  But we would expect that lag to be on the scale of months, not years as suggested by so many analysts -- including those who are predicting a similar experience to Japan's, which we have shown to be a completely inappropriate comparison.

Whatever the exact nature of the deflation fighting policy, at its core would be an effort to create more money and to get that money to be spent in the general economy.  Over time, an increase in the amount of money being spent in excess to economic production eventually leads to a reduced value for each unit of money -- inflation, in other words.  So the policy response to more deflation would sow the seeds of even more purchasing power loss in the future.  The worse the short-term brush with deflation was, the more money would be created, and the more inflation eventually to come.

Focus on High-Confidence Outcomes

Several of the factors that could cause an increase in inflation -- the dollar's exchange rate, the risk premium on US Treasuries, and commodity prices -- are determined by financial markets.  And it's abundantly clear that while markets almost always eventually move toward their fundamental values, they tend to react more to crowd psychology in the near term.  So while fundamentals are an excellent predictor of long-term market outcomes, it's really impossible to use them to reliably determine short-term outcomes.

The looming possibility of more quantitative easing or fiscal stimulus makes it even tougher to predict near term deflation or continued low inflation with any certainty.  And yet all over the analytical community, people are doing just that.  In a time of great monetary and market instability, we believe that trying to predict how high or low inflation will be several months out is an inherently low-confidence forecast.

We can forecast with high confidence, however, that if we do experience deflation or sufficiently protracted economic weakness, that more stimulus and QE will be employed until inflation is created.

We can also forecast with high confidence (based on the US' foreign indebtedness; the structure of its economy and political system; and prevailing policymaker attitudes towards inflation, stimulus, and debt) that the US dollar will at some point experience a substantial reduction in purchasing power against the things that Americans need to buy.

But while we consider these high-level outcomes to be nearly inevitable, it's much more difficult to pinpoint either their timing or the manner in which they will take place.  Our approach, then, is to own a diversified basket of investments that we believe will benefit should our high-confidence forecasts come to pass. 

We believe that this strategy will increase our chances of eventual success, but it has another positive aspect as well.  Because our varied investments often move in different directions from one another in the short term, and because some are far less volatile than others, we can take advantage of the market's inevitable ups and downs by tactically rebalancing into those areas with the best values at any given time. 

Another bout of deflation probably wouldn't be fun for us, but it would allow us an opportunity to increase our exposure to any good inflation-hedge investments that had been beaten down due to deflation fears.  This is what we did in late 2008 and early 2009, and we will continue to use this approach in an effort to turn short-term market moves -- even if they are "against" our long-term theses -- to our advantage.

Modifying our investment stance as valuations change isn't the same as speculating on short-term market outcomes, however.  The latter entails trying to guess where the herd will turn next, and we think that's just too risky.  We prefer to stay in alignment with the fundamentals and to try to take advantage of the ups and downs while we wait for the market to price those fundamentals in, as it always eventually does.

That means looking past the widespread inflation complacency and deflationary hand-wringing, and staying focused on the loss of dollar purchasing power that we strongly feel still lies ahead.

Great article from a Fortune.com Blogger

The Inside Scoop On Why A Double-Dip Is (or Is Not) Just Ahead

Posted by Bert Dohmen

Do you want to forecast the economy more accurately than 90% of all economists? It’s easy. I have been doing it for 33 years, using my theory of credit and liquidity.

Watching financial television, you see the majority of Wall Street economists being bullish. I just heard one ridiculous argument:  “You never have a recession without interest rates rising.” We have to forgive him, as he is fairly young. Early next year, there will be a lot of unemployed economists.
Economists so often get “cause and effect” reversed. They say, “low interest rates are bullish for businesses, low oil prices are bullish for the economy, low inflation is bullish for monetary policy, etc.” Actually, all these factors confirm the deflationary environment and are caused by that­­. They are confirmations of the bearish environment.

Here is how to do it better. First of all, forget the dozens of economic statistics, especially the ones published by the U.S. government. Many are “seasonally adjusted,” which simply means they are good for nothing. Then, several months later, they get substantially revised. How can you know what is important and what is not? Here is a guide you should copy and put on your trading computer.

Credit growth: The most important indicator is “credit growth” or lack thereof. Everything else follows. Actually, you could stop right there. However, there are two other factors to assist you, although they depend on credit growth.

Job growth: This is the most important economic factor dependent on credit growth. If there is no credit growth, then there will not be any sustainable job growth.

Consumer spending: For stock investors, the most important indicator is “consumer spending.” Consumer spending is a coincident indicator. When it declines, so does the stock market. It helped us identify the 2007 stock market top. If there is no job growth, then spending will depend on consumers who have jobs spending more. This can happen, but it can’t be sustainable. We have seen this over the past 16 months.

There you have it. Its simple. You can skip all the dozens of other economic numbers if you follow the above. That’s how I knew at the start of this year that the economy would falter. What is the economy doing now?

Credit card debt has been declining for 21 months and is now down about $150 billion dollars from its peak. Does anyone really believe that the retail sector can flourish with this shrinkage? Commercial & Industrial loans (to businesses) see no rise at all. There is no credit growth.

The latest job reports have been absolute disasters, confirming my view that the economy is doing very poorly. The theory of the “V-shaped” recovery is now being abandoned by the bulls. They are now changing their tune to “a soft patch” in the economy, just as I predicted. Some economists now mention a “square root-shaped” recovery. Soon, they will start considering a “double dip.” But that will also be the optimistic view. A “dip” infers a slight decline. However, it could be much deeper.

The U.S. economy added an average of less than 100,000 jobs a month in the first seven months of 2010. At least 125,000 to150,000 job are needed just to employ new people entering the labor force. About 250,000 new jobs are needed each month to have an average economic recovery. But the facts get worse. Read on.

There are now more than six million people unemployed for 27 weeks or longer. Such a dismal picture hasn’t been seen since the 1930s. The government’s estimates are much too optimistic as they guess the number of people getting jobs in small firms. That will be corrected for past numbers in February 2011. Watch for a nasty surprise. In the meantime, all the jobs numbers are distorted to the positive side.

The economists in the current administration are starting to abandon ship. Apparently, even the Keynesians can no longer support these disastrous policies. They don’t want to go down in history as the presidential economic advisors who presided over the greatest economic policy disasters since the 1930s.

Christina Romer, chair of the Council of Economic Advisers to the president, just resigned to return as a professor at UC Berkeley. She published a study several years ago that concluded that “an exogenous tax increase of 1% of GDP lowers real GDP by almost 3%.”


Obviously, that study contradicts everything the White House is now trying to sell to Americans, namely that the huge, upcoming tax hikes won’t reduce economic growth.


When the administration was pushing to get the “stimulus” bill passed, Romer said that if it were passed, the unemployment rate would not go above8% . Now it’s 9.5%, above 16% if we count people who haven’t looked for a job for 30 days. Mrs. Romer now says she regrets ever having made that statement.

Another member of the White House economic team and director of the Office of Management and Budget, Peter Orszag, also resigned recently. It appears he doesn’t want to go down in history as the budget director who presided over out-of-control deficits that destroyed the U.S. economy. However, while at the White House, he was vociferous in his defense of the policies that caused the astronomical rise in the destructive deficits.

That’s the problem with all these political appointments; people feel so honored being chosen that they compromise all their principles.


Bottom Line: There is no credit growth, and therefore, according to my long-standing theory, there can be no sustainable economic growth unless and until miraculously credit starts growing. However, given current policies in Washington, that seems unlikely at this time.

Where did all the stimulus the money go?

A read-the-whole-thing (aren’t they all?) Investors Business Daily editorial has some hard numbers on the stimulus that outfits like the Associated Press, even though they have reporters covering the news every day, have as far as I can tell rarely if ever published. It provides critical context in light of the President’s proposal to spend $50 billion more on infrastructure.
Its opening paragraph contains a gutsy question (bolds are mine):

The Obama administration’s latest idea for “stimulating” the economy is — you guessed it — more spending. Is this just a campaign ploy, or is the White House ruining the economy on purpose?
… But why in the world do we need another stimulus when we’re not even close to exhausting the funds allocated for the last one?
According to Darrell Issa, ranking member of the House Committee on Oversight and Government Reform, $275 billion of the initial $787 billion cost of that stimulus remains unspent. And of the $512 billion that has been spent, just $18.5 billion — or less than 7% — has been paid out by the Transportation Department, the main government infrastructure provider.
This is strange, since the stimulus was originally sold to us as a way to create “shovel-ready” jobs on infrastructure. Instead, much of the money was drained away for financially strapped states to keep their public unions and Medicaid programs afloat.

Remember that Ohio Senator The Invisible Sherrod Brown rushed back to Washington from his recently deceased mother’s wake (”White House supplied him plane to whisk him back to cast the 60th vote”) so he could be the final vote for this monstrosity that he could not possibly have read because it just had to be done at that moment. After all (figuratively speaking of course), the shovels were virtually ready, and workers only needed authorization to start digging — or so we were told. Uh, not exactly.
Back to the editorial:

Here’s what President Obama said about the stimulus bill he signed into law Feb. 17, 2009:
“Because of this investment, nearly 400,000 men and women will go to work rebuilding our crumbling roads and bridges, repairing our faulty dams and levees, bringing critical broadband connections to businesses and homes in nearly every community in America, upgrading mass transit, building high-speed rail lines that will improve travel and commerce throughout our nation.”
Sounded great at the time, but few, if any, of those things got done. Moreover, since the recession began, federal employment has jumped by 10%, or nearly 200,000 positions, while private-sector employment has plunged 7%, or 7.8 million jobs. So who really benefited from the stimulus? Big Government and its unions.

This is where it would be tempting to agree with New York Times columnist and pretend-macroeconomist Paul Krugman.
Krugman argued in his column yesterday that the stimulus wasn’t big enough. Based on the above, you could argue that he might have a point.
But even if you buy Krugman’s Keynesian crap (which I don’t), here’s the stronger counterpoint: We have an administration which either deliberately lied to us about how it intended to use the funds and its readiness to do so, or which is so breathtakingly incompetent that it allowed tens if not hundreds of billions to be misspent on handouts that should have gone to infrastructure and shovel-ready projects — or both.
Regardless of whether you pick option A or B (or both), the current bunch has proven that it can’t be trusted do what it says it will do with additional funding. I would argue that this is a problem with government in general when such huge amounts of money are involved, almost no matter who is in charge, but this crew has taken malfeasance and/or incompetence to depths previously not seen.
So as much as Paul Krugman might like to perform his next lab experiment on the rest of us by upping the stimulus ante to wartime levels (which is essentially what he has advocated, and which, by the way, Japan basically did during the latter stages of its Lost Decade of the 1990s — and it still didn’t work), or as much as Barack Obama might plead for yet another $50 billion allegedly targeted for infrastructure, the answer shouldn’t be “no.” It should be “heck no.”

-Article from Bizzy Blog

Hilarious Sign Failure at Sun Trust Bank

Another Warning on Muni's

Munis, Bank Layoffs, and Anti-Bailout Fervor

September 8th, 2010
By David Goldman
 
Full disclosure: I just unloaded a large part of my municipal portfolio. I am restricting my holdings to bulletproof bonds with ring-fenced revenue streams. New York City, my home town, went bankrupt once in my lifetime, and with financial industry employment vaporizing and real estate values falling, the Apple is lookng pretty wormy. Meredith Whitney yesterday forecast what everyone in financial industry management has been saying private for weeks: mass layoffs are coming in the banking sector. The banks simply can’t make money with a still-shrinking loan book, a flattening yield curve, and stupid-tight mortgage spreads (thanks to the Fed’s purchasing program).

A great deal of Obama’s $800 billion stimulus went to cover state and local budget gaps. It was political life-support for the hard core of the Democratic party political base, the public employee unions whose generous pension deals have turned into an estimated $3 trillion underfunding gap. As bond yields remain depressed and equity returns remain non-existent that gap will grow.

And we are about to get a Republican Congress populated by candidates who ran on a promise of no more bailouts. In a deep and prolonged recession, the voters simply won’t approve new taxes (or new deficits) to bail out public employees who have it better than most employees in the private sector. The drumbeat against government employees sounds nightly on Fox News.

From the Republican vantage point, the state and local government crisis represents a generational opportunity to burn out the base of the Democratic party. The cure for the crisis is to break the public employee unions. It’s as simple as that. Layoffs, salary and pension givebacks, hiring of non-union employees, and so forth will enable cities and states to adjust to the misery of their circumstances. I wouldn’t own Illinois state debt on a dare. Obama’s home town can’t expect mercy from the Republicans.

It has to get ugly. Police, firemen, transit workers and teachers will fight for what they have. The tug of war over scarce funds will take cities and states to the brink of bankruptcy and in a few cases, over it.
As for the banks: they were no more clever in 2009 than they were in 2007. After the huge bounceback in bank profits (as banks scuppered up cheap assets which then appreciated), bank management assumed that happy days were there again and begin hiring. By the second quarter of 2010, banks figured out that no such rosy scenario would ensue and began laying off. Ms. Whitney’s 80,000 number is pulled out of thin air. It could easily be more. The one way that banks can make profits is to reduce compensation costs. Instead of the old 80/20 rule (80% of profits are made by 20% of bank employees), it’s more like 99/1. “All the banks need is one guy to make sure that the firehouse is attached to the pump at the Fed, and a couple of guys to point the other end into the swimming pool” of bank assets, says one senior manager. How many credit officers do you need to NOT make loans? And how many salesmen do you need when ten customers account for 90% of your turnover?

The unraveling of financial industry employment and the end of the federal lifeline will conspire to make life rough pretty rough in New York City. Investors are well advised to stay out of the line of fire.

Be careful with your Muni's they are fragile

FROM ZERO HEDGE

Back in January, I outlined a general 2010 forecast for the financial markets to subscribers of my paid newsletter Private Wealth Advisory. All in all, I outlined ten specific items I thought would come true.

They were:

1)    MASSIVE increases in volatility in the markets

(CHECK)

2)    The Fed to continue its bailout efforts but in a more subtle “behind the scenes” manner (less public bailouts, more non-public lending windows/ purchases of Mortgage Backed Securities/ etc.)

(CHECK

3)    The market potentially struggle to a new high (potentially 1,200 on the S&P 500) sometime before March 2010 (this is negated by any major negative catalyst e.g. a sovereign debt default, major bank going under, etc.)

(CHECK though I was off by a month+ on the top, which occurred in April).

4)    Once the market peaks, a serious, VIOLENT reversal followed by a volatile roller coaster ride downward for the first half of 2010 culminating in a Crash

(CHECK on the first part and we’re getting there on the Second: the Crash).

5)    Several sovereign defaults and credit rating downgrades

(Sort of CHECK on the first part, DEFINITE CHECK on the second)

6)    Multiple states to beg for bailouts or default on their debt.

(Getting there but not yet)

7)    A municipal bond Crisis

(Check: Harrisburg last week)

8)    Interest rates to rise or inflation to break loose

(Half CHECK: Negative on interest rates, but food inflation and cost of living is breaking loose)

9)    China’s credit bubble to pop

(Getting there but not yet)

10) Civil unrest in the US

(Getting there but not yet: see Atlanta riots at section 8 housing)

All in all, every single one of these predictions has either come true or is in the process of coming true as I write this. I take great pride in my work, so I’m pleased to have provided such an accurate forecast to my subscribers. However, I get no pleasure from the fact the financial world is heading to “you know where” in a hand-basket.

Indeed, just last week my prediction #7, a municipal bond Crisis began in earnest when the capital of Pennsylvania, Harrisburg, dropped $3.3 million worth of municipal bond payments for the month of September.

This is just the beginning. Collectively US states continue to face massive budget short-falls in spite of massive Federal Aid. According to the Center on Budget and Policy Priorities, US states are expected to run deficits of $144 billion and $119 billion in FYs 2011 and 2012 respectively, unless they can cut spending further or raise taxes dramatically to close these gaps.

States can cut spending and raise taxes all they like, but the stark reality is that most of them have debt problems. And a growing number will be forced to choose between social programs and debt payments to make ends meet. Social programs buy votes, debt payments buy credit ratings.

Which do you think politicians are going to sacrifice?

I believe we that Harrisburg, Pennsylvania’s actions represent the very tip of the iceberg municipal bond missed payments and/or defaults. Remember, the muni bond market is $2-3 trillion in size, so we’re not talking about a minor issue here.

Worst of all, individual investors are the ones most likely to end up getting creamed.

Indeed, ever since the 2008 Crash, investors have been generally pulling money from stocks and putting them into bond funds. All in all they’ve put $480 billion into bond funds since June 2008. Of this, some $88 billion or 18% has gone into municipal bond funds according to the Investment Company Institute.

These folks are in for a very rude surprise when they find out that munis, which historically have maintained extremely low default rates, are not nearly as risky as once thought.

I strongly urge you to review any muni bond holdings you might have in your portfolio. Below is a list of the states with the largest projected fiscal deficits for FY 12.

State	Projected FY12 Shortfall	Shortfall as % of FY 11 Budget
California	$21.3 billion	25%
Connecticut	$3.8 billion	21%
Illinois	$17.0 billion	52%
Louisiana	$1.7 billion	21%
Minnesota	$3.8 billion	25%
Mississippi	$1.2 billion	27%
Nevada	$1.3 billion	36%
New York	$14.6 billion	27%
South Carolina	$1.3 billion	26%

Source: http://www.cbpp.org/cms/index.cfm?fa=view&id=711

However, as the case of Harrisburg, Pennsylvania proves, the muni bond crisis is going to be a state, city, and town affair, so examine EVERY muni bond you own, regardless of where it is located.

Good Investing!

Graham Summers

Animals Avoid GM Soy And Corn

Unbelievable it seems nature gave animals a way to tell what food is good for them.

Animals Avoid GM Soy And Corn

The GE-corn and GE-soy mentioned in this article are Monsanto's. The "food safety" bill in the Senate, S 510, is also Monsanto's. Monsanto's idea of "food safety" includes genetically engineered food, pesticides, hormones, antibiotics, or slaughterhouse waste, all toxic.

Different species of wildlife and farm animals are trying to tell us something by clearly preferring not to eat Genetically Engineered foods when they have a choice of naturally grown corn, soybeans and other crops as the following wisdom of nature anecdotes confirms.

In 1998, Howard Vlieger harvested both natural corn and a genetically modified Bt variety on his farm in Maurice, Iowa. Curious about how his cows would react to the pesticide- producing Bt corn, he filled one side of his sixteen-foot trough with the Bt and dumped natural corn on the other side. Normally, his cows would eat as much corn as was available, never leaving leftovers. But when he let twenty-five of them into the pen, they all congregated on the side of the trough with the natural corn. When it was gone, they nibbled a bit on the Bt, but quickly changed their minds and walked away.

A couple of years later, Vlieger joined a room full of farmers in Ames, Iowa to hear presidential candidate Al Gore. Troubled by Gore's unquestioning acceptance of GM foods, Vlieger asked Gore to support a recently introduced bill in Congress requiring that GM foods be labeled. Gore replied that scientists said there is no difference between GM and non-GM foods. Vlieger said he respectfully disagreed and described how his cows refused to eat the GM corn. He added, "My cows are smarter than those scientists were." The room erupted in applause. Gore asked if any other farmers noticed a difference in the way their animals responded to GM food. About twelve to fifteen hands went up. 1

"If a field contained GM and non-GM maize, cattle would always eat the non-GM first." -Gale Lush, Nebraska

"A neighbor had been growing Pioneer Bt corn. When the cattle were turned out onto the stalks they just wouldn't eat them." 2 -Gary Smith, Montana

"While my cows show a preference for open-pollinated corn over the hybrid varieties, they both beat Bt-corn hands down." -Tim Eisenbeis, South Dakota

"A captive elk escape and took up residence in our crops of organic corn and soy. It had total access to the neighboring fields of GM crops, but never went into them." 2 -Susan and Mark Fitzgerald, Minnesota



Bill Lashmett watched as two or three cows were let into a feeding area at a time. The first trough they came to contained fifty pounds of shelled Bt corn. The cows sniffed it, withdrew, and walked over to the next trough, which contained fifty pounds of natural shelled corn. The cows finished it off. When they were gone and released from the pen, the next group came in and did the same thing. Lashmett said the same experiment was conducted on about six or seven farms in Northwest Iowa, in 1998 and again in 1999. Identical trials with hogs yielded the same results, also for two years in a row.

The Washington Post reported that mice, usually happy to munch on tomatoes, turned their noses up at the genetically modified FlavSavr tomato scientists were so anxious to test on them. Scientist Roger Salquist said of his tomato, "I gotta tell you, you can be Chef Boyardee and mice are still not going to like them."1

The mice were eventually force fed the tomato through gastric tubes and stomach washes. Several developed stomach lesions; seven of forty died within two weeks. The tomato was approved without further tests [for human consumption].

WISDOM OF SQUIRRELS, ELK, DEER, RACCOONS, AND MICE - p. 126 excerpt

For years, a retired Iowa farmer fed squirrels on his farm through the winter months by placing corncobs on feeders. One year, just for the heck of it, he decided to see if the squirrels had a preference for Bt corn or natural corn. He put natural corn in one feeder and Bt corn in another about twenty feet away. The squirrels ate all the corn off the natural cobs but didn't touch the Bt. The farmer dutifully refilled the feeder with more natural corn and sure enough, it was soon gone. The Bt, however, remained untouched.

MISSING CHICKENS - p. 182 excerpt

According to BBC News, April 27, 2002:

"Safety tests on genetically modified maize currently growing in Britain were flawed, it has emerged. The crop, T-25 GM maize [corn], was tested in laboratory experiments on chickens. During the tests, twice as many chickens died when fed on T-25 GM maize, compared with those fed on conventional maize. This research was apparently overlooked when the crop was given marketing approval in 1996." 1

http://www.rense.com/general92/avoid.htm

Student Loans.... Worse than Credit Cards

http://www.ritholtz.com/blog/wp-content/uploads/2010/09/student-loan-scheme.jpg

Bank CDO Self-Dealing (And Modern Stock Trading) For Dummies

A Termite-Riddled House: Treasury Bonds

Pardon the language but an amazing post from zero hedge.



A Termite-Riddled House: Treasury Bonds
When termites eat your house, you don’t notice a thing. You don’t hear a thing, you don’t see a thing—you’re house stands there, silent and staid, while you and your family happily go about your days, without a care in the world—
 
—until your house crashes on top of your head.
 
Right now, we are at a stage where Treasury bonds are as weakened as a termite-riddled house. They look fine: Nice glossy coat of paint, pretty shingles, bright clear windows, sturdy-looking plankings on the open-aired porch.
 
But Treasuries are well on their way to a complete collapse. Why? Because of the way they have been mishandled and mistreated by the Federal Reserve Board, and the U.S. Treasury. Whether by incompetence or by design, U.S. Treasury bonds have become the New & Improved Toxic Asset. The question is no longer if they will collapse—it’s when.
 
Let me explain why.

 
First of all, what exactly were Toxic Assets—does anybody remember? I do: They were bonds made out of bundles of dodgy real estate deals. They didn’t seem dodgy at the time. What’s that old expression, “safe as houses”? At the time they were made, those bonds seemed safe as houses. Now we call them “Toxic Assets”—because now, we know better. But back then—before they collapsed—they were called “Mortgage Backed Securites”, or “Commercial Mortgage Backed Securites”, or else “Collateralized Debt Obligations”.
 
Essentially, all these sophisticated-sounding terms were to emphasize that the bonds were secured loans—the houses and commercial real estate were supposed to back up these debts. If the payments failed, the properties could be confiscated and auctioned off. So the bonds would be repaid. So the bonds were safe—safe as houses. Or so it was thought.
 
Of course, we saw how that show ended.
 
For those who missed those exciting episodes, a recap: Sub-prime mortgages began to default first, as the economy slowed down. This in theory should not have affected Mortgage Backed Securities based on those sub-prime loans. But the real estate which had been purchased with sub-primes weren’t worth what they had been purchased for—they were worth much less. So the bonds backed by the sub-prime loans began to explode.
 
Soon after the sub-primes, alt-A loans and prime loans, and finally commercial real estate—their prices all began to collapse, and so the bonds manufactured out of these loans also began to explode.
 
All those banks holding all those “safe as houses” MBS’s and CMBS’s and assorted CDO’s all of a sudden found that those bits of paper were not safe as houses. They were so un-safe in fact, that the banks damned near went broke—they would have, too, if it hadn’t been for the Fed and the Treasury, who bailed them out: The Treasury with TARP (cash), the Fed with “liquidity windows” (more cash).
 
But even that didn’t work—so we got “extend & pretend”, whereby the accounting rules were suspended in order to create the illusion of solvency among the TBTF (Too Big To Fail) banks. (My discussion of that is here.) That’s how bad the Toxic Assets were.
 
The reason these debts became “toxic” was that it became obvious in 2007–’08 that those bonds would never be repaid. They couldn’t be repaid: The properties which backstopped the value of the bonds had fallen irretrievably in price—or more properly, the real estate bubble which had goosed the valuation of those properties to absurd, Tulipmania levels had finally burst.
 
So even if the real estate was foreclosed and sold at auction, the holders of these now-Toxic Assets would only receive a fraction of the nominal price of the bonds. What had once been worth 100 was now worth 80, 60, 40, and in some cases, Cop Snacks.
 
I’ve never liked the term “asset”, when discussing bonds. They’re not “assets”—they’re debt. They’re a loan. And a loan only has value so long as it’s being repaid. If the debtor defaults—or tries to pay back the loan with something of less valuable than what was originally lent out—then this “asset” becomes a loss.
 
So to prevent these catastrophic losses, Backstop Benny—Ben Bernanke, Chairman of the Federal Reserve—essentially did the ol’ switcheroo on the Toxic Assets: In order to save the banks whose balance sheets depended so heavily on these now-dead turds, the Fed purchased the Toxic Assets at their nominal price. Then the banks—the so-called Too Big To Fail banks—took that cash and purchased U.S. Treasury bonds.
 
I have yet to find a better chart than this one here, that describes so succinctly how the Fed expanded its balance sheet to bail out the banks. (Hat tip Ashley Huston at WSJ.com: Alex Lowe designed the chart, based on reporting by Phil Izzo—extra-special kudos to them both.)
 
Meanwhile, the U.S. Treasury, in its attempts to finance bailouts, stimulus, health care, Social Security, and endless pointless wars, went into further debt—to the tune of $1.4 trillion dollars, roughly 10% of U.S. gross domestic product, for both 2009 and 2010.
 
Or to put it another way—a very scary way—in both 2009 and what’s projected for 2010, the Federal government has issued $1 of Treasury debt for every $1 of tax receipts. Between the actual budget deficit, plus Social Security liabilities, the U.S. Federal government is in the hole for about $13.5 trillion—or roughly 100% of GDP: That is what the Federal government owes. And if 2011 continues to be the same (as is almost certainly to be the case), then another $1.5 trillion or so (give or take a couple of hundred billion dollars) will be added to that tab.
 
All told, the United States will have a fiscal-debt-to-GDP ratio of 100% this year, and 110% next year—if not higher, depending on the tax receipts in 2011. A lot of wishful thinking is going on for 2012, but the way the numbers are playing out, another trillion dollars’ worth of debt is very likely in the offing—which would put the total fiscal-debt-to-GDP ration to 120%.
 
(Funny: That number—120%—reminds me of something . . . what was it? Oh! Right! Greece! This past spring, Europe had a medium-sized meltdown when Greece—roughly 2% of the EU as measured by GDP—revealed it was running a 120% fiscal-debt-to-GDP ratio. The Europeans and the IMF finally caved and bailed out Greece. Ah, the Greeks! But I digress, sorry—after all, the United States is not Greece. The United States has absolutely nothing in common with Greece—not at all! First of all, buddy, and for your freakin’ information, the United States is roughly 45 times the size of Greece, and . . . oh . . . wait a sec . . . )
 
Let 2012 take care of 2012—right now, September 2010, we have 100% fiscal-debt-to-GDP, in an environment of falling tax receipts and more strains on the various social safety nets. Right now, we have debt matching tax receipts dollar-for dollar. Right now, the interest on the outstanding debt, for 2010 according to government projections, is $375 billion—in other words, 25¢ of every dollar of tax receipts goes to pay interest. Right now, with recent economic numbers, the likelihood of a turn-around are unlikely—so because of the inevitable political pressure come the winter, more “stimulus” is likely in the offing.
 
Meaning more Treasury bonds, floating out into the market.
 
But who is buying all this new Federal government debt? Why, that’s very simple: The Federal Reserve.
 
The reason that the Federal government could go into the aforementioned massive spending spree was precisely because of the Federal Reserve’s bail-out: The Fed created money out of thin air (as is their power), in order to buy Toxic Assets from the Too Big To Fail banks. The banks, in turn, took this cash and bought Treasuries—which financed the Federal government’s deficit.
 
This is what I call Stealth Monetization: Unlike in some banana republics, which dispense with the niceties and simply turn on the printing presses whenever they need more money to spend, the U.S. Federal government and the U.S. Federal Reserve got creative, and used the TBTF banks to essentially hide the monetization of the fiscal debt in plain sight.
 
Many people complain that the bail-out money the TBTF banks received was never lent out—oh, but they’re wrong: The money was lent out. It was lent out to the Federal government. 
 
After all, what did the TBTF banks do, with all that cash they got from the Federal Reserve for unloading all those Toxic Assets? Why, they went and bought themselves boatloads of Treasury bonds.
 
It’s been the Federal government that has been “mopping up excess liquidity”—mopping it up and spending it on stimulus that doesn’t work, wars that can’t be won, dodgy dinosaur-projects that aren’t going to do squat to improve people’s health. That’s why the TBTF haven’t been lending money to businesses and “getting the economy back on track”—they’ve been too busy lending to the Federal government.
 
Clever people call Treasuries “assets”—but like I’ve said, I’m just stupid: I just call it debt. When I look at all this Federal government debt—unprecedented amounts of fiscal debt—I can’t help but notice that it is all unsecured—because it is unsecured. At least Toxic Assets had something backing them up, even if they were worth much less than advertised. Treasury bonds, on the other hand, are based only—solely—on the “full faith and credit” of the United States Federal government.
 
Y’Know: The one in Washington. The same U.S. Federal government that is running 100% debt-to-GDP ratios this year, 110% next year, and likely 120% the year after that—if not more.
 
Mm-hmm . . .
 
What happens when a debtor becomes so over-extended that he cannot possibly pay back his loans? Naturally: They default—or they try to wriggle their way out of the debt, by giving you something less valuable than what you are owed.
 
It is not controversial to say—and indeed, it is widely discussed—that the U.S. Treasury has only two options: Default on Treasury bonds, or debase the currency by way of inflation, so that the nominal value of Treasuries is stable, but their real value decays by inflationary attrition.
 
Default is politically unacceptable—apart from pissing off foreign Treasury holders, it would cause havoc in America if the Federal government woke up one day, clapped its hands like a schoolmarm, and announced to the world, “Okay Treasury holders! Time for a haircut!” Default ain’t gonna happen.
 
So that leaves “controlled” or “induced” inflation—the only method for the Federal government to get out from underneath this debt.
 
Backstop Benny is doing his damnedest to bring about precisely this scenario: He is trying to print the economy out of this Global Depression. With QE, the recently anounced QE-lite, and the likely-to-be-coming-soon QE2, Bernanke is going to pump more and more money into the system—“Print ’til you puke!!” seems to be his motto.
 
Bernanke is being egged on by everyone, from Paul Krugman to the Republicans to Larry Summers and Tim Geitner—everybody wants him to print more: Either because they want more fiscal spending (Krugman, et al.), or because they want asset prices to be pumped up again to unnatural highs (Wall Street and their Washington lackeys).
 
And Benny is obliging. The way Bernanke is doing this printing is by buying Treasuries. The Federal Reserve buys Treasuries and squirts some more dollars into the system—just as he propped up the prices of Toxic Assets by buying them up, when there was the need.
 
Yields of Treasuries are at absurd lows, there is a veritable T-bond rally every single day that equities drop even just a bit—in other words, Treasuries are in a bubble. Why? Because the market knows that Bernanke and the Fed will backstop Treasuries—
 
—backstop them right off the cliff.
 
The more the Fed prints, the more it encourages the Federal government to “stimulate”—id est, go further into debt in an attempt to grow the economy out of this Depression by way of fiscal spending. But as I said, right now, 25¢ of every dollar of tax receipts goes to pay interest on the fiscal debt. How long before 50¢ of every dollar goes to pay interest? 100¢ of every dollar? Is that when the fiscal debt finally becomes insurmountable?
 
Or will there be a Moment of Clarity in the markets? Will there come a day when the bond markets collectively realize that Treasuries will never ever be repaid—cannot be repaid? And when that day comes, when that Moment of Clarity falls on the markets, will it spark a panic?
 
In two previous posts, I essentially said “yes”: “Yes” to a collective Moment of Clarity, “yes” to a panic in Treasuries. I further argued that such a panic would lead—inexorably—to a flight to safety in actual, physical commodities, which would then result in a massive hyperinflation that would kill the dollar dead. Part I is here, Part II is here.
 
What is most important is, I do not know when such a Moment of Clarity will occur—but I have no doubt that it will occur. Inevitably, unavoidably: Treasury bonds are bound to collapse, triggering the sequence of events that I have described.
 
Plenty of people disagree with me. Actually, most people disagree with me.
 
Weirdly, plenty of people told me in no uncertain terms that, not only would there never be a panic in Treasuries—these people claimed that there couldn’t be such a panic. A couple of these people claimed (I swear to God) that it was systemically impossible for there to be a panic in Treasuries—“Because the government can just print its way out of a panic!”
 
Uh-huh. So no hyperinflation after a Treasury bond collapse, ’cause the government can—y’know—print all the money needed to shore up Treasuries and avoid hyperinflation. Okay.
 
The people who defended this insane argument are under the spell of MMT—Modern Monetary Theory. It’s currently the most fashionable dismissal of the importance of Treasury over-extension. People in this camp effectively say, “Treasury debt doesn’t matter!”, and explain how government debt is basically a numbers game.
 
According to this theory—which is just a modern-day retelling of the chartalist myth—all money is basically government chits, which are moved around within a game-board, said game-board being owned and controlled by the government. According to MMT, governments which issue their own currency may go into as much debt as they wish, certain and confident that nothing bad will happen because the government controls the currency. In other words, macroeconomically speaking, MMT claims that it’s a government’s world—we only live in it.
 
My objection to this, in snooty eccy terminology: I think that these MMT macro-economic theorists are purveyors of an interesting new meta-neo-Keynesianist world-view. It seems they are employing a closed-system, zero-sum proto-monetarist model. This model—though compelling—does present certain structural issues and disappointing limitations, vis-à-vis the uses of a reserve currency, which might make the theory less than apropos, were it to face a real-world scenario. Or not.
 
My objection to this, in just plain ol’ regular words? I think this MMT theory is full of shit, propagated by fucking idiots.
 
MMT is just a clever way to justify insurmountable levels of fiscal debt—it’s a rationalization of this insurmountable debt, using a veneer of economic terminology to cloak the purveyors’ political ideology of spend!-spend!-spend!-your way out of a recession or depression: In other words, Keynesianism-redux. Keynesianism on steroids—Keynesianism gone fucking in-sane.
 
(I’m going to write a detailed take-down of these MMT fools in a couple of weeks. But for now, let me limit myself to just a couple of paragraphs.)
 
These irresponsible peddlers of MMT claptrap—because that’s what they are, irresponsible buffoons for peddling such irresponsible, arrogant bullshit—simply do not understand what money is: It is a medium of exchange. The government—which controls this medium of exchange, especially in a fiat currency—is supposed to be the honest broker between economic participants who use this medium of exchange for their transactions.
 
A government issues the medium (the currency), and the government can debase it at will, for whatever reasons it deems worthy. But if the medium—the currency—is debased to a tipping point, then the economic participants will no longer believe in the currency’s worth. They will therefore run from the currency, and turn elsewhere to fulfill the need that money satisfies, which is: To store wealth, and to act as a medium of exchange.
 
If the dollar and Treasury bonds are pushed hard enough—that is, debased hard enough—there will come a point where people will lose trust in them both, and not want them. It’s one thing if a currency organically inflates by way of ordinary demand on consumables and expansion of credit—that’s just normal fiat currency wear-and-tear. It’s quite another if economic parties realize that a government is deliberately trying to debase the currency, in order to get out from under insurmountable debt.
 
If people no longer trust dollars as a medium of exchange and Treasuries as stores of value, where will they go? They will leave both and go to something else—commodities, as I have argued. And when that day comes, people will do anything to get out of the dollar and Treasuries, and into something that is stable in terms of value storage and medium of exchange.
 
MMT doesn’t see this—it just sees spread-sheets and board-games. This story here, which giddily, girlishly describes Federal Reserve drones “printing money”—and how wonderful and magical that process is—is pretty indicative of the fundamental detachment from reality of this world-view.
 
It’s why MMT fails at describing both reality, and predicting the future. It’s why—among other reasons, which I will discuss more fully in another post—MMT is a big ol’ steaming crock of shit.
 
MMT is one theory as to why nothing bad will happen to Treasuries.
 
The other theory—much more sensible, and backed up with empirical evidence—is what I’d call the Japan Is Us theory of Treasury bond stability. It’s the only truly serious challenge to the argument of Treasury bond collapse which I am arguing. Therefore, it’s a challenge that must be met.
 
On the blogosphere, Michael “Mish” Shedlock is probably the smartest proponent of the Japan Is Us theory.
 
I have a lot of respect for Mish—he was one of the very few serious commentators who argued that the U.S. economy was going to experience deflation. He argued that position literally years before it caught on. People now—in 3Q of 2010—are wising up to deflation. Because of Mish’s insights, I was on to deflation as of 3Q of 2008—and was fortunately able to plan accordingly.
 
Mish also thinks I’m full of it, for claiming that there’ll be a Treasury bond collapse, commodity spike and then hyperinflation.
 
His rationale is, we are experiencing deflation (which I agree). This deflation has been brought about by destruction of credit (check again), brought by the bursting of the housing bubble and the concomitant reduction in mortgages and loans (check once again).
 
Mish further argues that, like Japan, the U.S. Federal government will spend-spend-spend on all sort of needless projects, but that the deflation is much stronger. Therefore, no matter how much the U.S. spends, there is no way to escape from a Japan-style Lost Decade (or two) of stagnant growth and systemic deflation.
 
This is where we part company.
 
Mish is convinced that through these deflationary years/decades, Treasuries will continue to be the only safe store of value. From a recent post, here’s a representative quote:

I do think corporate bonds, especially most junk is playing for the greater fool. regards to treasuries, there is going to be an exit problem for sure, but that could be years away. In Japan, yields stayed low for a decade. Why can't it happen here?
Yields certainly might stay low for an extended period. Whether or not they do remains to be seen.  

(The underlining is mine.)
 
Mish thinks that there’ll never be a Moment of Clarity, regarding Treasuries. He admits that there might be an “exit problem” in Treasuries, but vaguely posits that that might be “years away”. In the meantime, he thinks that Treasury yields will remain low, prices high (or go even higher), as companies and banks basically “keep money under the mattresses”.
 
Mish has a good case in arguing for the Japan Is Us theory—but he is wrong, on two fronts.
 
First, Mish doesn’t realize that Federal Governments’s deficit spending is rapidly approaching its limit. Because unlike Japan in 1990, when its deflationary death-spiral began, the U.S. Federal government started this depression already with a massive deficit. The eight years of Bush 43, to be precise, were all borrow-and-spend years: In those eight years, the fiscal deficit had already goosed the economy.
 
That’s why the massive stimuls Obama implemented hasn’t really helped—the economy is already hung-over from the Bush stimulus years.
 
Besides—and so obvious that it shouldn’t even be up for debate—yearly fiscal deficits of 10% of GDP per year are simply unsustainable. I don’t care what argument you make, deficits of this ever-increasing size will lead to a collapse in the economy. Certainly a blow-up in Treasuries—the instrument of this deficit—long before.
 
Mish further fails to realize that the Federal Reserve has abandoned both of its mandates—to fight inflation and to maintain full employment—in favor of its new mantra: Maintaining aggregate asset price levels. Whatever it takes. This means essentially inflating asset price levels back to pre-Depression levels.
 
Everything the Fed has been doing since September 2008 has been in the service of this goal. The MBS buys, the alphabet-soup of liquidity windows, QE, now QE-lite, QE2 soon to come—the Fed is hell-bent on maintaining the bubble it created between 1987 and 2007.
 
Since September 2008, the way the Fed achieved this goal was by effectively nationalizing private debt, and turning it into public debt—one look at the Fed balance sheet is enough to convince any skeptic. This means that all the bad debt accumulated during the last two-and-a-half decades have been effectively turned into Treasuries.
 
So Treasuries are getting squeezed and pulled two ways: By the U.S. Federal government, and by the U.S. Federal Reserve. Because of the massive fiscal debt of the Federal government, Treasury bonds will not be repaid, at least not in real terms. And because of the Federal Reserve’s constant goosing of their prices in order to both maintain low interest rates and prop up asset prices, Treasury bond prices have left planet earth altogether, and are in the realm of Bubble-land.
 
In a couple of private e-mails, Mish objected to—and dismissed—my Treasury-run/commodity-moonshot/hyperinflation scenario altogether. According to him, I was arguing for a Shazaam! moment: When all of a sudden—for no reason whatsoever—people would collectively panic and—Shazaam!—they would exit Treasuries en masse.
 
Mish is actually right—that’s what I’m saying. I pompously call it a “Moment of Clarity”, Mish more cuttingly calls it a Shazaam! moment.
 
But that is, in essence, what I am arguing: Because in a termite-riddled house, no one can predict when the house will collapse—but we all know deep in our bones that it will collapse. So the second you hear a creak in the plankings, what do you do? You run for the exits.
 
I have no idea when that Shazaam moment will happen: Tomorrow, next month, next year. But it will occur—because everybody knows that Treasury debt cannot be repaid. So it’s not a question of if—the damage has been done, and is irreparable. It’s now just a question of when.
 
I hope I have explained why.