There is an interesting story from CNBC.com that illustrates that a bond trader is concerned that the bond market will collapse. It is not the fear that the bond market will collapse that caught my eye, it is the fact that he thinks deflation will fuel the collapse. I do not see that happening, exactly, yet at least. Clearly housing is still seeing deflation and we are not at the bottom yet either.
Logic dictates that we should all be gearing up for inflation, now, but the data does not lie and I can pull the most aggressive data I want and it shows ultra low inflation rates which is scary, frankly. With the massive printing and monetization of debt that we have seen over the past 2 years we should see some inflationary pressure, somewhere, but nothing. Not only has the Fed’s balance sheet grown, but it is growing and so is the national debt, at a record breaking rate. Still, inflation is nonexistent which is puzzling to all economists and policy makers, even housing that is given the most generous tax breaks and, recently, a huge tax credit to buy is showing that prices are falling, not rising. This is a severe problem and it is going to get worse.
Deflation will continue to rip through the economy as the deleveraging continues which could be for another 3-4 years, but there are always caveats which I will go over. The primary reason there is no inflation, this isn’t rocket science unless you are an economist, but credit is contracting and people are saving more which means less money is in circulation. Bank balance sheets are enormous right now, but the irony is they are still largely insolvent and even if they could lend why would they with 10% unemployment and initial claims coming in at 470K a week? All of this means prices will drop lower across all categories, except for food which I admit has me perplexed as well.
The primary reason is the fact that everyone is deleveraging and paying down debt. We live in a society that was driven by consumption, but that consumption was not organic, i.e. actual income driven, it was credit driven. Once that credit is gone, and it is long gone, consumption ends as we once knew it. Sure, we will have hot products like the iPad, why, I do not know, but that is not for me to decide and even those products have a certain shelf life meaning their appeal will eventually wear off. Especially when we have initial claims, on a monthly basis, at 1.8M which is twice the population of Montana and the target market, 18-30, is experiencing a high rate of unemployment.
This lack of inflation is not lost on the Federal Reserve and believe me they are worried about it. Tomorrow you will not see any drastic change in their language or actions. They will likely get rid of paying interest on bank deposits, what’s the point if inflation is nil. In fact, I am willing to bet, this will not be in the announcement, that the Fed’s balance sheet will get even bigger and what should concern you is the amount of currency swaps that appear on their balance sheet. Those swaps are for Europe’s banks that “are just fine” so they can settle their trades in the relatively safe reserve currency, the USD. If that number keeps growing the problems in Europe are much larger than we are being told. Europe will also weigh heavily on tomorrow’s decision and that will be a reason that no major action will be taken as well.
It is clear that deflation or disinflation is here at the moment and I am sure it will get worse, but it will also be somewhat quick. As many of you know the U.S. has decided to not pass an official budget this year. This is the first time this has happened in almost 40 years and there is only one reason I can speculate this is not happening, the $1.6T estimated by the President was a little too conservative and the actual number is probably much higher. Why debate that before the midterm elections? It would also bring the U.S. front and center in the whole sovereign debt fiasco that Europe is going through at the moment. Frankly, our balance sheet is much, much worse than what we are so critical about over in Europe and we haven’t even instituted socialized medicine, yet.
Deflation is great for U.S. treasury debt as investors can capture greater real returns and the treasury pays out little interest, but this is not going to last long. Our deficits and our tinkering in China’s affairs is about to bite us in the rear end in a big way. First, we owe too much and can never, ever repay it, there is just no way out of it and we cannot “grow our way out” and the people suggesting that are loony tunes. Second, I suspect the RMB, Yuan, China’s currency, will eventually weaken, I am very sure of it, but it may also strengthen in the meantime which would be humorous only because China would then be running big trade deficits, not surpluses, and would not have to buy our debt. I wonder how well our $40B daily auctions would go then.
I also wonder if Congress will actually pass the much dreaded Currency Manipulator Bill they are threatening China with, I think that is Smoot-Hawley on steroids. If both these things happen, China lets the currency strengthen to get the U.S. off their back, right before they drop it to new lows, and Congress passes their tariff act, that is essentially what it is, what would that do? It would force Americans to pay much more for goods, that is inflationary, and it would force China to either not buy more U.S. debt because there is nothing to hedge against and in all likelihood China would end up being net sellers of treasuries because all of their bubbles would have popped and they would need to get liquid. All thanks to politicians who have no clue how capital works. That would lead to inflation in a big way because all that inflation we exported over the years would wind up right back home where it belongs. This, of course, is a worst case scenario.
What is more than likely to happen is the fact that the U.S. simply continues to spend and the bond market slowly begins to demand a higher risk premiums. Eventually it will end up like Greece where the U.S. cannot borrow at reasonable rates, but long before that the Fed will take matters into its own hands and begin to buy treasuries through quantitative easing programs, they did it once, they can do it again, right? Except this time it will be inflationary, but not from a money velocity point of view, from a dollar depreciation point of view. That is much worse because you actually do not have to increase money velocity to destroy the currency which will crush savers and the middle class.
The beauty of this is it doesn’t happen all at once, it happens over a period of months and the government will tell you this is a good thing. How you say? Oh, it is a perfect plan. Because we consume about 80% of what we produce domestically so we won’t see it right away, but what we will see is our exports increase dramatically, because the dollar is falling on the international markets. More people will become employed, sounds good right? Well, I am not done yet. As people become employed they spend more and prices rise and as prices rise wages will need to increase, but no one is buying our debt still, except the Fed. The money supply will have to keep growing to keep up with inflation so they print, monetize and send out more money to banks to get into circulation. Wages will increase at exponential rates, but it won’t mean anything.
You see, it is all fake, driven by the monetization of our debt and eventually the dollar will simply be worth nothing and no one will want to trade with us or at least do business in our currency which means production stops because you cannot exchange our currency for anything else, it is Zimbabwe. The printing of money is a dangerous thing and the economists who insist that what separates us from Greece is that we do have a printing press are right, but for the wrong reasons. It is much more dangerous that we have a printing press because we can do terrible things to ourselves and what I just laid out above it could happen. It might happen because there is historical precedence. There are 2 well documented cases, the Weimar Republic and Zimbabwe.
It happened, in both cases, quickly, very quickly and in Germany’s case they started out with deflation, much like what we have now. As the government repaid debt and tried to keep the economy going they printed money and they went from deflation to inflation in the blink of an eye. They were so efficient at printing money they eventually only printed money on one side of the paper, to speed up the process. They even used wood tokens so people could at least burn them for some value. It doesn’t take much to start down the path of inflationary cycles because neither the Germans or Zimbabwe wanted to be the poster child for hyperinflation, quite the contrary in fact, they, like Ben, think they can control events, capital. That is where they went wrong, capital has a mind of its own and once a path is determined it is tough to change course or stop it altogether. Some very smart men were in both countries and they failed at stopping the inflationary onslaught. I highly doubt our Fed can stop it since they admit they cannot see things coming anyhow.
As far as the folks who say these things cannot happen here, well, they can and they will. It is inevitable at some point and there is no way a deficit reduction committee can stop it or implement a plan to reduce our debt before it happens. There is no political will left in Washington to stop their spending ways. Especially with some 78M Baby Boomers about to receive the mother of all socialized benefits, how do you say no to the largest voting bloc in history? You don’t. I believe that the whole deflation/inflation debate is irrelevant as we will have both. Plus, investing for deflation is really no different than normal investing, some bonds and strong dividend paying stocks which should be your core holdings anyhow. Inflationary investing, well, that is a different story and while I prefer toilet paper and gold you may prefer tobacco and food, either way. The point is, it is coming and you will not see it happening until it is here.
In an unusual twist from the US’s largest creditor China is demanding the release of Bernie Madoff and want him appointed either as Federal Reserve Chairman or Treasury Secretary immediately. The Chinese demand this to be done because it is becoming increasingly concerned that the current US government is unaware on how to properly run a Ponzi Scheme properly. It seems Beijing is perplexed on how US administration officials and the US media does not seem to understand the difference between annual budget deficits, which is the annual funding gap, versus the reduction of total national debt.
Obviously I am kidding, but there is a chance that the Chinese or other foreign creditors might actually feel this way. Considering the administration started talking about debt reduction and fiscal restraint only to come out with a spending freeze, after they increased those same budgets the year before essentially locking in the budget increases, which will only reduce the annual budget deficit by $250B over 10 years. Notice I said annual budget deficit? That means we are still bleeding red as far as the eye can see and we are doing nothing to reduce the national debt problem we have, which is the largest the world has ever seen, throughout history.
While the administration is at least acknowledging the problem and doing more than Bush ever did they are still doing what politicians do, playing with the words. When regular people hear budget deficit reduction many think this is great, we are paying off our national debt! Wrong. What our wonderful leaders are doing is telling us that they are still going to have to borrow hundreds of billions or trillions a year, but they are reducing the amount of their shortfall on an annual basis. Basically, it means nothing because we are still spending way more than we have. The biggest expenditure that we have is on entitlement programs which everyone admits we cannot cut, but Obama did reduce funding to elderly and disabled housing subsidies which may actually give some credence to the “death panel” argument during the health care debate. I mean if you’re willing to throw grandma out of her home or nursing home than why not have death panels, I am just saying now.
Regardless, what we know is that there is no way any politician will do what is necessary to cut the annual deficit down for real, which means higher entitlement taxes, longer waiting periods for benefits or reduced benefits in general. Instead they will merely grandstand against each other while they slowly, or not so slowly is some projections are correct, destroy the entire country. I do not mean this to be partisan, most know I blame both parties for this mess and pray for a real third party to create some competition in politics, come on 2 parties is not a democracy it is a choice between dumb and dumber. Well, technically we actually live in a Republic anyhow so this basically shows us how limited our politicians are in their actually knowledge when they claim we have the greatest democracy in the world.
The bottom line is that we are adding to the national debt everyday and there is no way to stop it without serious action. The action I speak of will never be taken, not yet at least, but eventually they will happen, if we make it that far. The numbers are simply staggering when you think about it, $14T debt ceiling, $107T in unfunded liabilities and the numbers just get bigger and bigger. The entire US mutual fund industry is $15T so the government could confiscate every mutual fund asset in the US and we would barely payoff our debt, think about that for a minute. In a couple of years that $14T will be much bigger and a large reason that the debt ceiling will have to continually be increased, before the repeal the debt ceiling language that is, is to pay the interest on our debt. The crazy thing is we actually have to borrow money to pay the interest on our debt, talk about insolvency?
To steal a line from Dick and Jane; “Dick, I think were in a bit of a pickle” is completely appropriate right now. We are in the midst of the greatest debt bubble ever created and I have no idea how it will end, but I do know it will end and it will more than likely be very ugly. On an interesting, slightly off-topic, have you noticed the public-private lending facilities being set up with the TARP proceeds? I predicted that would happen a few months ago, I just wanted to say I told you so. Anyhow, there have been lots of interesting happenings lately in politics which I will be writing about very soon. I was incredibly sick for the past 5 days so I apologize for not humoring you with my tasteless jokes, or whatever you call them. In the meantime I am still very bearish, expecting unemployment to be particularly ugly and GDP, well we knew it would be huge, but 5.7%? Expect revisions down to 3%, but if you believe the 5.7% please contact me about fabulous leasing opportunities in Pakistan.
To kick off the New Year you should go read this guy’s silliness. It is no wonder why he has been largely discredited and why he completely missed the housing bubble in 2005-06, he was the guy laughing at Peter Schiff when Schiff told him lending standards were nonexistent, guess who was right?
What I found amazing is that Mike Norman actually thinks that issuing treasuries is not borrowing money. Furthermore, he actually states the following, this blew my mind because it is utter nonsense:
Some would argue that the vote simply gave the government the right to “borrow” $290 billion more, so it did not really increase its spending power at all, only the amount it could take from others. This argument would be wrong.
Government spending, by definition, increases the amount of reserves in the banking system and those reserves are the funds used to buy Treasury securities. Therefore, it is correct to say that government spending itself provides the money to buy the debt.
How else can you explain how the national debt went from $900 billion to $12.4 trillion over the past 30 years with interest rates falling to historic lows or even zero? If the issuance of government debt were truly “borrowing” then rates would have climbed to astronomical levels.
If this made you say, what!? You are not alone. I know what he is saying and on the surface he is kind of right, but it is also the words of a true idiot. I will explain this in a very simple way for Mike to understand, if you issued your own debt and could control your interest rates, would you keep interest rates, the amount you pay, high or low? Clearly you would keep the amount you pay low, unless you like paying a lot more for what you borrow. Now, that is a very simplistic way of approaching the total issue and it is much more involved than that, but I fear if he reads this getting into details would probably confuse him.
Apparently Mr. Norman is one of these people who thinks you can issue unlimited debt or “increase the amount of bank reserves to buy treasury securities” and we never have to pay the piper. I find this fascinating that one can think that investors will never, ever, want their money back or that even though we have to pay interest on the amount of money we spend it is still not considered borrowing. I am not sure how that is not debt or borrowing nor am I sure how one can borrow their way to prosperity, but I find this disturbing among many economists in the US, including one Nobel Prize winning economist who writes for the NY Times a lot.
The last time I checked those who tried to borrow their way to prosperity, Dubai, Argentina, home owners, Eastern Europe and so on all ended up not doing so hot or defaulting. I am not suggesting the US will default on its debt, that would be crazy, we will simply inflate our way out as that is the game plan. Well, I guess I am early in giving out my 2010 Contrarian Award to Mr. Norman for going against all conventional wisdom and basic economic teachings when we examine debt and prosperity. Debt, for a lack of a better term, is good. I gotta stop, my head hurts.
Today was packed full of economic data that was less than impressive and in some cases downright scary. As you already know GDP, as predicted, was restated down to 2.8% and is likely going to be pushed further down again by the time we get the next report. Most say that the GDP revision is no big deal because it is looking in the rearview mirror, but I see it as a big problem as the market was pushed up dramatically based upon that report and many hailed the recession over based on that number.
The reality is that the revision down shows, with absolute clarity, that the economy is weak and without the governments support we would have pushed a negative number. I will say the number would have been relatively flat, somewhere in the -.5 to -.1%, but nevertheless very much anemic and not reflective of this so called V shaped recovery. The consumer is also in rough shape and the consumer confidence number was certainly nothing to write home about, but hey let’s not let the facts get in the way of a great recovery story.
The housing data was very interesting especially if you like month old stale data, but the widely watched Case-Shiller Index was up a whopping .3% which gave everyone a reason to cheer this morning. Of course it is widely known that the reason for the increase was because of distressed home sales and the tax credit. That housing data was on top of the huge, seasonally adjusted, data on Monday showing a 10% jump in sales, but again it was seasonally adjusted and the jump was because of, guess what, distressed sales and the first time tax credit. I know, the tax credit was renewed and expanded which I am sure will do wonders for the estimated 25-35% of existing home owners who are underwater in their existing mortgages and the 17.5%, U-6 report, unemployed or underemployed in America, not to mention the 50% of Americans worried about losing their jobs or having their taxes hiked to unspeakable levels. Again, let’s not let the facts get in the way of a great recovery story.
The Fed minutes were released today, nothing too shocking in them, but the mere fact that the Fed is not willing to remove its balance sheet largesse or raising interest rates should be a huge red flag for everyone, but apparently it is not. I happen to agree that there is no immediate inflationary threat, I say that with some apprehension as oil and other commodities do indicate some inflationary pressure, I would not expect any interest rate hike for some time into 2011 or ever. Given our countries debt load do you really think we could ever raise interest rates? I don’t think so. We have $12T in total US debt, treasurydirect.gov which is counting backwards now for some reason, and out of the $7T in treasuries some $2.8T comes due next year.
Add another $1.4-$2T in new deficit spending, plus the next new stimulus to be announced soon, and the US has to raise some $4.8-$5T in debt next year, not including refunding. Based on that number and the current interest rates at 2.4%, or so, we cannot afford to raise interest rates because the debt service costs would cripple us and we are having a hard time placing longer term treasuries, just watch the auctions for proof. That means we will constantly have to be issuing new deficit debt at shorter maturities and rolling our old debt into <10 year treasuries. Soon we will have to be rolling $8-9T a year in new and old debt every year and that means we will not want to be paying a lot of interest on it. Even though the Fed is “independent” from political influence, which it is not (see quantitative easing for proof), it is my contention that it has been told that it has to keep rates low forever. Well, maybe they weren’t told, Ben is no dummy after all, it is really just a math thing.
This leads me to believe that the dollar will probably stay weak for sometime into the future, like forever. I do think that we will see a spike in its value in the near future simply because it is oversold and the global economy is not that rosy, see China and the bubble talk from leading real estate moguls. If China does pop, which it probably will, then the dollar will see its day in the sun for sometime leading equities lower, commodities lower and treasuries higher. As I have said for some time now, stocks, bonds and commodities cannot all be right yet they are all going up at the same time, that is not a good sign, sorry.
Longer term the dollar will go much lower and here is the really scary thing, the Yen is outperforming the dollar. Japan has lower credit ratings than the US, they have an older population and higher debt to GDP ratios, but we are following right behind Japan fairly quickly in all categories. Based on that information how in the world can the Yen be doing so well, comparatively, to the USD? That should worry people, but it does not. Mish Shedlock actually foresees a crisis in the Yen before the USD, but if that is the case why is it doing better than the USD? Mish is no dummy and I hold him in high regards, but the signal I am getting is that we are in bigger trouble than Japan. I base that on a few facts, they save money, are net exporters and creditors, we do the exact opposite. Therefore, if the dollar strengthens and commodities get hit, buy gold heavily.
At the rate the US is going we are heading for fiscal disaster and we have an increasingly bolder President and Congress who seem to endorse the bankruptcy of the republic. The previous administration is equally as guilty as they did not see a spending bill that they did not like either, but the primary difference is we were promised changed, transparency and real change. We received none of what we were promised and from my vantage point the economy, which is what Americans are really looking at, is getting worse not better.
In my neck of the woods Penn Traffic just went into chapter 11 and will promptly be firing 5,000 people, they were a grocer so go figure that a grocer went out of business, and Adidas is moving 100 jobs out of this area for foreign shores, those are not green shoots. Only now does the government decide to make jobs a top priority, but I thought that is what the $797B stimulus bill was for? I guess I misunderstood what they were saying when they passed that bill at the dead of night on that Friday in February. Never fear though as the government is here to save the day with another estimated $500B jobs bill that will more than likely be passed in early January 2010, just in time for the BLS announcement of the overstatement of some 800,000 jobs between January and March of 2009.
My point is that is things were truly better than we would not even be having this discussion. Unemployment would not be climbing towards 11% and firms like Johnson and Johnson would not be trimming their work force by 6%. The Federal Reserve would not be keeping rates at 0% and continuing quantitative easing, which is monetizing the debt no matter how you cut it.
Foreclosures would not be increasing and the mortgage modification programs would not be failing, see CNBC Reality Check for the story how people still fall behind after they modify their mortgage, the FDIC would not be in the red by $8B, there would not be 550 banks on the FDIC troubled bank list (an increase of 140 banks since last quarter), banks would not be worrying about bringing on off balance sheet SIV’s into the light, and the Fed would not fear anyone looking at their books. If all were fine, none of those things would be open for discussion, but they are and we are talking about them. As I have also said many times before, it is a year later and what has really changed? Banks still hold the same bad debt on their books, but the accounting rules have changed, that’s it and everything else is the same which means we still got major problems.
First, let us clear something up, health care reform is totally different from the monstrosity that is currently in front of the Senate at this moment. Health care reform would mean that the government would be telling insurers that they could no longer discriminate against preexisting conditions, annual and lifetime caps would be removed and insurers would lose their federal exemption from anti-trust laws. Health care reform has nothing to do with a public option, period. The current mess in congress does reform some of those issues I mentioned, but not all of them and it creates far more damage to the system than it will solve.
Now, this is an issue near and dear to my heart as someone with cancer and who desperately needs his health coverage that I currently have. I am not the only one in this position, as I am sure you can imagine, and there are millions like me out there who are waiting to see how Congress will screw this issue up for us. Here is what I foresee happening in the near-term and how a death sentence will be issued to many people like me.
Congress will pass this budget busting, horrible health care package that will help the most destitute of Americans, who already qualify for Medicaid or similar programs I might add, and will immediately drive up the cost of existing plans to people like me who already pay through the nose for health care coverage. Once this thing passes my monthly premiums will jump from $1,200 a month to $2,000 or more a month because insurance companies will be out of business starting in 2014 when the public option, i.e. socialized health care, begins. This will make health insurance unreachable for most Americans and small businesses putting people like me at risk of dying because I will not be able to afford health insurance, the irony.
Let’s not forget that I will have a “Cadillac” plan, because that is what NY makes you have, so add another 40% tax to my premium and if I make $250K a year add another tax to my income tax, on top of my already high taxes, and how am I supposed to pay my other bills? It will make very little sense for me to put any effort into anything or to make any money at all if this thing passes. In fact the cross over point is somewhere close to about a third of what I make now so I will literally not have to work in a couple of years and I will end up netting the exact same amount of money and pay less in taxes. I am not the only one figuring this out either, so guess what will happen? All the bad people, i.e. “rich” people, will decide to make less because it is easier and less of a headache which means all those estimates the Senate is coming up with are going to be shot to hell.
The real fun will begin after 2014 when the supposed 31 million Americans, mostly illegal’s from what I can tell, will then flood the doctors’ offices. This is when the fun really begins. We will then have to get used to extremely long waits at doctors’ offices because we have more people with insurance and we will have less doctors because they will be reimbursed less, since it will probably be a Medicare like reimbursement system. Doctors will not stay in this business for the $25-$40 they get reimbursed for government health plans, would you? That means the polls showing that doctors will quite if this nationalized health care plan is approved are probably accurate or at the very least doctors will flock to specialties so you can forget about preventative care or GP doctors.
At this point in time innovation will have stopped because there are going to be taxes on biotech companies and other pharmaceutical companies, read the bill. We will have a health care system exactly like Canada or the UK which by all accounts is great, f you are not sick. If you are sick in those countries you get out and come to, guess where, America, but that will be long gone by 2015. We, Americans, will be flocking to China, India or somewhere else in South East Asia for health care because there will be no waiting, it will be cheaper, the service and survival rates will be better. For the life of me I have no idea why we, the country where other citizens flock to for medical treatment, would revert to a socialized system that is failing other countries not only in terms of their health, but also in terms of their national financial health.
If you think about it who goes to the UK or France to get cured of cancer? I didn’t I went to Boston along with many people from the UK and France. Who goes to Canada for surgery? They come here. The only people who venture to those countries are those who do not have insurance and refuse to pay for anything on their own, which I get that this is an issue, but it does not warrant the US going to socialized health care for 10% of the population. Also, the UK, France, Germany, Switzerland and any other country that offers socialized health care has a debt to GDP ratio that is horrible, worse that ours, but our actual number is that largest of all, so why would we do this at all? We can’t afford this and to think we can is absurd.
We currently owe $12.03T (TreasuryDirect.gov) which is 81% of out GDP and some $3T comes due of the $12T next year. That means we have to fund about $5T in US debt in 2010, depending on how much this wonderful government decides to spend next year, which will be a record, think about that for a minute. We have never done that before and even Moody’s is beginning to doubt the solvency of the US government and now the government wants to add socialized health care to this mess? How in the world can we pay for this? We cannot. Even the Chinese are saying, um, how are you going to pay for this? They, the Chinese, will not show up at some point in time to buy our government paper because they know we will not be able to pay off our debt.
We have yet to even raise our debt ceiling yet from the $12.1T to the $14T we need to raise it to for next year’s deficit spending. Yet our Senators will pass this monstrosity of a bill for the “greater good” of 10% of the population who already qualify for Medicaid, but are too good to apply for it! Then they will wonder why people like me end up losing their insurance next year and rates go through the roof, surely it will because of the big bad insurance company who, by the way, paid for more $10,000 procedures for me than I would care to admit to. This bill not only impacts the insurance industry, but it impacts every American in ways that you cannot imagine from your insurance coverage next year to the very solvency of the country in the next 10 years. This government needs to be stopped before they destroy this country and kill people like me.
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