http://finance.yahoo.com/tech-ticker/article/482959/If-CDS-Spreads-Are-Right%2C-Then-Europes-Bailout-Fund-Is-a-Giant-Failure
While European credit default swap spreads have contracted substantially post the announcement of a super bailout fund for troubled Eurozone nations, they are still pretty ugly for Greece and Portugal.
Wednesday, May 12, 2010
Vallejo bankruptcy
SAN FRANCISCO — The city of Vallejo filed for bankruptcy protection Friday to deal with a ballooning budget deficit caused by soaring employee costs and declining tax revenue.
http://www.foxnews.com/story/0,2933,357881,00.html
http://www.foxnews.com/story/0,2933,357881,00.html
Pennsylvania's state capital considers filing for bankruptcy
Pennsylvania's state capital considers filing for bankruptcy
Harrisburg, Pa., is debating whether to declare Chapter 9 bankruptcy. As cities struggle to balance their budgets, more may consider the option.
http://www.bloomberg.com/apps/news?pid=munievents&sid=ab6OQc35weDI
Harrisburg, Pa., is debating whether to declare Chapter 9 bankruptcy. As cities struggle to balance their budgets, more may consider the option.
http://www.bloomberg.com/apps/news?pid=munievents&sid=ab6OQc35weDI
Monday, April 26, 2010
Chicago Politicians want the National Guard for police...
Police Supt. Weis: National Guard isn't solution to city's gun violence
State Reps. Fritchey and Ford want National Guard's help fighting crime
April 25, 2010
BY KIM JANSSEN AND FRANCINE KNOWLES Staff Reporters
Chicago Police Supt. Jody Weis today spoke out against a request for the Illinois National Guard to be to deployed on Chicago’s streets to help tackle gun violence.
Stopping just short of outright rejecting the request from state lawmakers Rep. John Fritchey and Rep. LaShawn Ford, Weis said “I don't think the National Guard is the solution.”
Chicago Police Supt. Jody Weis told the media this afternoon that he doesn't think deploying the Illinois National Guard on Chicago's streets is the solution to the city's gun violence.
(Jean Lachat/Sun-Times)
At a press conference earlier Sunday, Fritchey and Ford had called on Gov. Quinn and Mayor Daley to deploy troops. The action, in coordination with Weis, should be taken as soon as possible to help get guns and criminals off the street, they said.
The two Chicago Democrats noted National Guard members are now working side-by-side with U.S. troops to fight wars in Iraq and Afghanistan, while another deadly war is taking place in Chicago neighborhoods.
“Is calling for National Guard deployment a drastic action? Of course it is,” said Fritchey. “Is it warranted under these circumstances? Without question. If we can bring (the National Guard) in to help fill sandbags for flooding... to deal with tornado debris, we can bring them in to save lives.”
So far this year, 113 people have been killed across Chicago — precisely the same number as the number of U.S. troops killed in Iraq and Afghanistan combined during the same time period, the legislators noted.
"U.S. troops have been winning the hearts and minds (of people) in Iraq," Ford said. “They’ve stabilized those communities. They made those communities much better. Now those communities are safe. That’s what we want right here in Illinois, for the National Guard to come in and stabilize these communities.”
State Reps. Fritchey and Ford want National Guard's help fighting crime
April 25, 2010
BY KIM JANSSEN AND FRANCINE KNOWLES Staff Reporters
Chicago Police Supt. Jody Weis today spoke out against a request for the Illinois National Guard to be to deployed on Chicago’s streets to help tackle gun violence.
Stopping just short of outright rejecting the request from state lawmakers Rep. John Fritchey and Rep. LaShawn Ford, Weis said “I don't think the National Guard is the solution.”
Chicago Police Supt. Jody Weis told the media this afternoon that he doesn't think deploying the Illinois National Guard on Chicago's streets is the solution to the city's gun violence.
(Jean Lachat/Sun-Times)
At a press conference earlier Sunday, Fritchey and Ford had called on Gov. Quinn and Mayor Daley to deploy troops. The action, in coordination with Weis, should be taken as soon as possible to help get guns and criminals off the street, they said.
The two Chicago Democrats noted National Guard members are now working side-by-side with U.S. troops to fight wars in Iraq and Afghanistan, while another deadly war is taking place in Chicago neighborhoods.
“Is calling for National Guard deployment a drastic action? Of course it is,” said Fritchey. “Is it warranted under these circumstances? Without question. If we can bring (the National Guard) in to help fill sandbags for flooding... to deal with tornado debris, we can bring them in to save lives.”
So far this year, 113 people have been killed across Chicago — precisely the same number as the number of U.S. troops killed in Iraq and Afghanistan combined during the same time period, the legislators noted.
"U.S. troops have been winning the hearts and minds (of people) in Iraq," Ford said. “They’ve stabilized those communities. They made those communities much better. Now those communities are safe. That’s what we want right here in Illinois, for the National Guard to come in and stabilize these communities.”
Sunday, April 25, 2010
Food inflation
Article about how the price of food is beginning to rise; according to this article food prices took their biggest jump in 26 years.
The Bureau of Labor Statistics (BLS) today released their Producer Price Index (PPI) report for March 2010 and the latest numbers are shocking. Food prices for the month rose by 2.4%, its sixth consecutive monthly increase and the largest jump in over 26 years. NIA believes that a major breakout in food inflation could be imminent, similar to what is currently being experienced in India.
http://www.cnbc.com/id/36720622
Inflation has gone up 26% overall since 2000. Check out this inflation calculator; fun to play around with, but it's kind of depressing...
http://www.usinflationcalculator.com/
The Bureau of Labor Statistics (BLS) today released their Producer Price Index (PPI) report for March 2010 and the latest numbers are shocking. Food prices for the month rose by 2.4%, its sixth consecutive monthly increase and the largest jump in over 26 years. NIA believes that a major breakout in food inflation could be imminent, similar to what is currently being experienced in India.
http://www.cnbc.com/id/36720622
Inflation has gone up 26% overall since 2000. Check out this inflation calculator; fun to play around with, but it's kind of depressing...
http://www.usinflationcalculator.com/
Who Stole Joe Public's Lunch?
I have recently realized just how divergent our opinions are - even among members of this forum - in regard to just who is to blame for the insolvency which resulted in the "Recession of 2008". Some point to the government. Some claim it was corporations. A few point to the banks. Still others blame the American people. But while all of these institutions share a bit of responsibility, many of them are simply used to shroud the largest and initial cause of that insolvency, the central banking system. And the insolvency it has perpetuated is no mistake.
The Federal Reserve. Unfortunately, most Americans are ignorant of the fact that the Federal Reserve is neither federal, nor reserve. It is a private banking system, established by private bankers, and sold to Congress and the American people as a measure of stability for the US Economy (despite having presided over the market crash of 1921, the Great Depression, and seven other major recessions). Although the Fed is subject to some restrictive legislations (including one that enables the Senate to approve its chairmen), it is privately managed and administrated. The bank officially claims to not be private, but it is certainly not federal or governmental. Yet surprisingly, this non-governmental bank has been granted the sole authority to issue the official money of the United States.
Creation of the Federal Reserve. The Federal Reserve was created by the world's leading private bankers. Among them were Paul Warburg, representative of the Rothschild banking dynasty; Frank Vanderlip, president of the National City Bank of New York; and three senior executive officers of J.P. Morgan. The bank was brought online in a time when larger banks (such as J.P. Morgan) were experiencing increased competition from smaller, emerging US banks. The Federal Reserve System was a carefully devised smokescreen to create a central bank to which all of these smaller banks would be regulated and taxed by.
The Environment That Enabled The Federal Reserve Act. Possibly the single largest political issue of the day in the earliest part of the 20th Century, was a shared disdain for a central bank (such as the Bank of England) by the American people. A central bank had been an experiment exactly two times, and was each time dissolved. But this time around, the idea of a central bank was hidden behind a clever naming convention (which avoided either the notion of "central" or "bank"), a system of regional banks that provided a smokescreen for centralization, and the idea that the system was actually a governmental mechanism to protect the people. The system was carefully devised, the fear of the people after the panic of 1907 was played upon, and legislation was passed in 1913.
What resulted was literally a bank with monopolistic power over the US money supply. Ultimately, the Fed fought and earned the ability to make the money supply "elastic", which is to say that they could print it at will in order to lend more, earning more and more interest. It also had a measure of control over all of the other banks in the US, legislated to it by the Senate. Local banks were forced to buy shares in the regional federal reserve banks, which made up the Federal Reserve.
But with authority to issue money, the Fed enabled these member banks to create money that cost them nothing. Of course, the member banks were required to borrow that money from the Fed with interest, but it could be lent to other borrowers at a much higher interest. The lenders would not only pay the money back, but with a handsome amount of interest. Again, these loans cost the central bank nothing, because it didn't even have to own the gold it initially represented.
In addition, the idea of the loans costing the central bank nothing was even more prolific when money eventually became based on nothing. So in sum, the central bank had the sole power to print money, which was based on nothing, and convert it to valuable assets by lending it to borrowers on interest. So even when a borrower defaults, the Federal Reserve sustains no real loss, because the money it lent actually cost it nothing to begin with. (However, default isn't "good" per se, because that loan ceases to be an asset). And the central bank could even collect a tax by all of the smaller banks who were enabled by the central bank to make those same loans.
But just how the bank makes their money is what is most terrifying. Because the asset is the loan itself due to the interest that it yields, the bank doesn't really want the loan to be ever fully repaid. They want the loan to remain on the books and the interest payments to continue. What this means is that while the banks make some money on private loans, the most is made on corporations, and even more on governments. This is due to the inability of governments to balance their budgets. Very few governments have EVER repaid their debts in full, so loans to governments represent an asset that may potentially pay forever. So the best result FOR THE PRIVATE BANKS WHO ACTUALLY CONTROL THE MONEY SUPPLY, is for those loans to remain outstanding.
Treasury Notes As A Debt Instrument. Because the US Government cannot balance its budget, it is forced to borrow. No surprise here. But the means in which it borrows is by selling Treasury Securities. These T-notes, T-bonds, and T-bills are essentially IOUs, issued to "lenders", and are repaid with interest.
Now enter the Federal Reserve. The Federal Reserve, using money it creates from nothing, purchases an enormous amount of these securities from the US Gov, essentially loaning it money. In 2007, the Federal Reserve held about $800 billion in Treasury Securities - equal to the total amount of the US money supply at that time. After two major bailouts, funded mostly with new US T-notes, bills, and bonds; that number is much higher. So essentially, the US Government is heavily indebted to the Federal Reserve Bank.
Perpetuation of Debt. Because the central banking institution wants to maintain its interest payments (chiefly by governments and mega-corporations), it will work very hard to prevent them from defaulting. Usually, this is done by lending more money. In the case of governments, the Federal Reserve loans more money by purchasing more debt (T-notes, bills, and bonds). So the debt is sustained, much to the joy and prosperity of the regional reserve banks. If a nation or corporation edges on default, the Federal Reserve will simply loan it more money, further entreanching this debt relationship.
Rescheduling of Debts. When the total revenue of a corporation or tax income of a government becomes tied up in simply paying interest, the notion of default becomes more and more enticing. But the central banking system wants to reatin their assets (interest-paying loans), so it does something called debt rescheduling. This is where the interest payments are reduced, but for a lengthened loan term. Again, this further cements the debt relationship, and eventually creates the perception of insolvency when even this agreement becomes untenable.
Bailouts, the Most Clever of the Fed's Strategies. Because the Federal Reserve was sold to the American people as a measure of monetary stability, it still holds a degree of misplaced trust among both individuals and government (although that level of trust is diminishing). As such, when borrowers become INSOLVENT as we saw wholesale in 2007, the Federal Reserve goes to Congress and asks for more free money to "bail out" involvent borrowers.
The Fed, still erroneously viewed as a government entity, plays on fears by warning of economic disaster if "liquidity" is not regained. So Congress approves "bailouts", which enable the Fed to create more money out of nothing. Most of this money in 2008 and 2009 went to the regional Federal Reserve Banks, giving them more free money to create more loans (interest-producing assets). The rest of it went to the Federal government to bail out... drumroll.... the nation's major member banks and even some mega-corporations.
It needs to be remembered that the nature of the economic turmoil in 2007-2008 was an inability to repay debts. Individuals were unable to repay mortgages, and then those major financial corporations were unable to repay the moneys owed to the regional reserve banks. What is interesting then, is where that new money from the bailouts was injected. It very well could have been injected at the American taxpayer level, but it was in fact injected at the mega-bank level (Merrill Lynch, J.P. Morgan, Bear Stearns, etc.). That's because these are the institutions who get their liquidity by borrowing from the Federal Reserve, and as such, pay the interest to the Federal Reserve.
These bailouts become increasingly costly to the American people. Ultimately, once the market adjusts by realizing this revaluation of currency based on a massively inflated supply of money; costs will increase. But increased costs are simply a devaluation of the dollar. So cleverly, all costs sustained by bailing out these major corporations and banks was shifted from the banks (who who profit from it) to the American people.
Even more cleverly, the entire package is blamed on corporate America for their "greed". Of course corporations are "greedy". That's what keeps them in business. Of course corporate excesses and corruption should be prosecuted, but instead we perpetuated it by bailing them out. In short, corporations contributed to America's economic turmoil, but merely revealed a massively unsustainable debt system that was created by a private, central banking system.
This post is based on readings from the following works:
Heal The Money System Heal Society by Suzanne Phillips
The Creature From Jekyll Island by G. Edward Griffin
"What Has Government Done To Our Money?" Murray N. Rothbard
http://www.survivalistboards.com/showthread.php?t=107488
The Federal Reserve. Unfortunately, most Americans are ignorant of the fact that the Federal Reserve is neither federal, nor reserve. It is a private banking system, established by private bankers, and sold to Congress and the American people as a measure of stability for the US Economy (despite having presided over the market crash of 1921, the Great Depression, and seven other major recessions). Although the Fed is subject to some restrictive legislations (including one that enables the Senate to approve its chairmen), it is privately managed and administrated. The bank officially claims to not be private, but it is certainly not federal or governmental. Yet surprisingly, this non-governmental bank has been granted the sole authority to issue the official money of the United States.
Creation of the Federal Reserve. The Federal Reserve was created by the world's leading private bankers. Among them were Paul Warburg, representative of the Rothschild banking dynasty; Frank Vanderlip, president of the National City Bank of New York; and three senior executive officers of J.P. Morgan. The bank was brought online in a time when larger banks (such as J.P. Morgan) were experiencing increased competition from smaller, emerging US banks. The Federal Reserve System was a carefully devised smokescreen to create a central bank to which all of these smaller banks would be regulated and taxed by.
The Environment That Enabled The Federal Reserve Act. Possibly the single largest political issue of the day in the earliest part of the 20th Century, was a shared disdain for a central bank (such as the Bank of England) by the American people. A central bank had been an experiment exactly two times, and was each time dissolved. But this time around, the idea of a central bank was hidden behind a clever naming convention (which avoided either the notion of "central" or "bank"), a system of regional banks that provided a smokescreen for centralization, and the idea that the system was actually a governmental mechanism to protect the people. The system was carefully devised, the fear of the people after the panic of 1907 was played upon, and legislation was passed in 1913.
What resulted was literally a bank with monopolistic power over the US money supply. Ultimately, the Fed fought and earned the ability to make the money supply "elastic", which is to say that they could print it at will in order to lend more, earning more and more interest. It also had a measure of control over all of the other banks in the US, legislated to it by the Senate. Local banks were forced to buy shares in the regional federal reserve banks, which made up the Federal Reserve.
But with authority to issue money, the Fed enabled these member banks to create money that cost them nothing. Of course, the member banks were required to borrow that money from the Fed with interest, but it could be lent to other borrowers at a much higher interest. The lenders would not only pay the money back, but with a handsome amount of interest. Again, these loans cost the central bank nothing, because it didn't even have to own the gold it initially represented.
In addition, the idea of the loans costing the central bank nothing was even more prolific when money eventually became based on nothing. So in sum, the central bank had the sole power to print money, which was based on nothing, and convert it to valuable assets by lending it to borrowers on interest. So even when a borrower defaults, the Federal Reserve sustains no real loss, because the money it lent actually cost it nothing to begin with. (However, default isn't "good" per se, because that loan ceases to be an asset). And the central bank could even collect a tax by all of the smaller banks who were enabled by the central bank to make those same loans.
But just how the bank makes their money is what is most terrifying. Because the asset is the loan itself due to the interest that it yields, the bank doesn't really want the loan to be ever fully repaid. They want the loan to remain on the books and the interest payments to continue. What this means is that while the banks make some money on private loans, the most is made on corporations, and even more on governments. This is due to the inability of governments to balance their budgets. Very few governments have EVER repaid their debts in full, so loans to governments represent an asset that may potentially pay forever. So the best result FOR THE PRIVATE BANKS WHO ACTUALLY CONTROL THE MONEY SUPPLY, is for those loans to remain outstanding.
Treasury Notes As A Debt Instrument. Because the US Government cannot balance its budget, it is forced to borrow. No surprise here. But the means in which it borrows is by selling Treasury Securities. These T-notes, T-bonds, and T-bills are essentially IOUs, issued to "lenders", and are repaid with interest.
Now enter the Federal Reserve. The Federal Reserve, using money it creates from nothing, purchases an enormous amount of these securities from the US Gov, essentially loaning it money. In 2007, the Federal Reserve held about $800 billion in Treasury Securities - equal to the total amount of the US money supply at that time. After two major bailouts, funded mostly with new US T-notes, bills, and bonds; that number is much higher. So essentially, the US Government is heavily indebted to the Federal Reserve Bank.
Perpetuation of Debt. Because the central banking institution wants to maintain its interest payments (chiefly by governments and mega-corporations), it will work very hard to prevent them from defaulting. Usually, this is done by lending more money. In the case of governments, the Federal Reserve loans more money by purchasing more debt (T-notes, bills, and bonds). So the debt is sustained, much to the joy and prosperity of the regional reserve banks. If a nation or corporation edges on default, the Federal Reserve will simply loan it more money, further entreanching this debt relationship.
Rescheduling of Debts. When the total revenue of a corporation or tax income of a government becomes tied up in simply paying interest, the notion of default becomes more and more enticing. But the central banking system wants to reatin their assets (interest-paying loans), so it does something called debt rescheduling. This is where the interest payments are reduced, but for a lengthened loan term. Again, this further cements the debt relationship, and eventually creates the perception of insolvency when even this agreement becomes untenable.
Bailouts, the Most Clever of the Fed's Strategies. Because the Federal Reserve was sold to the American people as a measure of monetary stability, it still holds a degree of misplaced trust among both individuals and government (although that level of trust is diminishing). As such, when borrowers become INSOLVENT as we saw wholesale in 2007, the Federal Reserve goes to Congress and asks for more free money to "bail out" involvent borrowers.
The Fed, still erroneously viewed as a government entity, plays on fears by warning of economic disaster if "liquidity" is not regained. So Congress approves "bailouts", which enable the Fed to create more money out of nothing. Most of this money in 2008 and 2009 went to the regional Federal Reserve Banks, giving them more free money to create more loans (interest-producing assets). The rest of it went to the Federal government to bail out... drumroll.... the nation's major member banks and even some mega-corporations.
It needs to be remembered that the nature of the economic turmoil in 2007-2008 was an inability to repay debts. Individuals were unable to repay mortgages, and then those major financial corporations were unable to repay the moneys owed to the regional reserve banks. What is interesting then, is where that new money from the bailouts was injected. It very well could have been injected at the American taxpayer level, but it was in fact injected at the mega-bank level (Merrill Lynch, J.P. Morgan, Bear Stearns, etc.). That's because these are the institutions who get their liquidity by borrowing from the Federal Reserve, and as such, pay the interest to the Federal Reserve.
These bailouts become increasingly costly to the American people. Ultimately, once the market adjusts by realizing this revaluation of currency based on a massively inflated supply of money; costs will increase. But increased costs are simply a devaluation of the dollar. So cleverly, all costs sustained by bailing out these major corporations and banks was shifted from the banks (who who profit from it) to the American people.
Even more cleverly, the entire package is blamed on corporate America for their "greed". Of course corporations are "greedy". That's what keeps them in business. Of course corporate excesses and corruption should be prosecuted, but instead we perpetuated it by bailing them out. In short, corporations contributed to America's economic turmoil, but merely revealed a massively unsustainable debt system that was created by a private, central banking system.
This post is based on readings from the following works:
Heal The Money System Heal Society by Suzanne Phillips
The Creature From Jekyll Island by G. Edward Griffin
"What Has Government Done To Our Money?" Murray N. Rothbard
http://www.survivalistboards.com/showthread.php?t=107488
Saturday, April 24, 2010
Doug Noland: “There Is No Concern For Short-Term Funding Issues”
Doug Noland: “There Is No Concern For Short-Term Funding Issues”
by John Rubino on April 24, 2010
Prudent Bear’s Doug Noland was a must-read in the years leading up to the bursting of the housing bubble. Almost alone out there, he got not just the fact that we were heading off a cliff, but the exact mechanism of our demise: “Wall Street alchemy” was creating unlimited amounts of artificial securities that the marketplace was treating like money, which sent the effective global money supply through the roof and fueled a series of ever-bigger bubbles.
Once the crash came, Noland reined it in a bit and his articles fell off my automatic “Best of the Web” list. But now the bubble is back and so is Noland. His latest post dissects the current “recovery” and explains why we’re headed back into interesting times:
Deficits and Private Sector Credit
The bullish contingent is these days increasingly confident that there is much more to the recovery than a mere stimulus-induced “sugar high.” The marketplace now comfortably disregards bearish developments – and becomes further emboldened by “market resiliency”. The market this week brushed aside issues with Greece, China, Goldman and financial reform.
Complacency abounds, in true Bubble fashion. The U.S. stock market dismisses that there could be meaningful ramifications from the unfolding Greek debt crisis. Chinese authorities’ recent determination to restrict mortgage Credit barely garners a headline. And while the Goldman allegations generate great interest and discussion, few believe they will have much general market impact. Financial reform, well, it’s an afterthought when the market is open. Market participants are enamored with the notion that the securities markets and real economy are now conjoined in the initial phase of a big bull cycle.
Count me a subscriber of the “sugar high” thesis. The combination of double-digit (to GDP) deficits, protracted near-zero rates, and the Fed’s unprecedented Trillion-plus monetization has worked wonders. Government stimulus stabilized the Credit system, asset prices, system incomes and economic output. The bulls today believe that a new expansionary cycle has commenced, and fundamentals and prospects couldn’t be much more encouraging from their point of view. Surging stock prices have the optimists disregarding the possibility of a systemic addiction to massive government spending, ultra-low rates, and overabundant marketplace liquidity. Potential issues in the area of risk intermediation are not on the radar screen.
Yet, the sustainability of this recovery will be determined by private sector Credit – eventually. The markets assume private Credit growth will snap back after its long recuperation – as it always has in the past. But, mostly, analysts expend little energy pondering this issue. Deficits of about 10% of GDP, rapid expansion of government-backed Credit (MBS, “build America bonds,” student loans, bank deposits, etc.), and near-zero rates have created a recovery backdrop where minimal private-sector growth has sufficed. This won’t always be the case.
Greek Credit default protection began December at 176 bps. Not many months ago there was little fear of a debt Crisis and no worry of default. Yet here we are today with Greece 2-year debt yielding 11% and annual default protection priced at about 600 bps. Markets fear insolvency and debt restructuring.
The U.S. Treasury borrows these days for three months at 15 bps and for two years at 1.02%. No one dares contemplate how dramatically the world would change if fear injected itself into the equation. While there is certainly more recognition of the structural debt issues confronting our government borrowers (local, state and federal), there is no concern for short-term funding issues. There was an important aspect of the Wall Street/mortgage finance Bubble that receives little attention: The explosion of Credit provided an enormous boost to governmental receipts. Especially in the case of federal debt ratios, boom-related revenues reduced borrowing requirements and distorted debt-to-GDP ratios.
At about 70% of GDP, outstanding Treasury debt is not on the surface overly alarming. Obviously, if one throws in GSE liabilities and the massive future spending obligations related to social security, healthcare, pensions, etc., things are much worse. Yet it is conventional wisdom that the U.S. has the luxury of several years to get its fiscal house in order. And there is today great faith that economic recovery will, as it always does, lead a revival of government receipts and ensure rapidly declining deficits. Count me skeptical. The previous Bubble helped disguise underlying structural debt issues at the state, local and federal levels. Going forward it’s payback time.
…The unfolding Greek debt crisis, China Bubble vulnerability, and more intense scrutiny of Wall Street risk intermediation now work in confluence to increase the probability for a negative surprise in our risk markets. Sure, the equities bulls have become intoxicated by some incredible stock and sector performance. But equity market reflation must be approaching the point of unnerving the bond market. And it can’t help sentiment that, as reported today by CNBC’s Steve Liesman, a rising number of FOMC members support a timely sale of assets and a removal of the Fed’s extraordinary liquidity measures. More bearish fundamentals for the private-sector Credit mechanism gladly ignored by a stock market Bubble.
Some thoughts:
Exactly. We’ve replaced the housing bubble with a government debt bubble, and there’s no way to transition back to private sector-led growth. The amount of debt needed to fuel an economy this unbalanced is simply too great.
Some kind of serious negative event is virtually a lock in the coming year. It might be the spread of Wall Street lawsuits or a PIGS country default. Or the bond market might simply decide it’s eaten enough and get up from the table. No way to know what it will be, but we’ve created the conditions for another nasty “surprise”.
by John Rubino on April 24, 2010
Prudent Bear’s Doug Noland was a must-read in the years leading up to the bursting of the housing bubble. Almost alone out there, he got not just the fact that we were heading off a cliff, but the exact mechanism of our demise: “Wall Street alchemy” was creating unlimited amounts of artificial securities that the marketplace was treating like money, which sent the effective global money supply through the roof and fueled a series of ever-bigger bubbles.
Once the crash came, Noland reined it in a bit and his articles fell off my automatic “Best of the Web” list. But now the bubble is back and so is Noland. His latest post dissects the current “recovery” and explains why we’re headed back into interesting times:
Deficits and Private Sector Credit
The bullish contingent is these days increasingly confident that there is much more to the recovery than a mere stimulus-induced “sugar high.” The marketplace now comfortably disregards bearish developments – and becomes further emboldened by “market resiliency”. The market this week brushed aside issues with Greece, China, Goldman and financial reform.
Complacency abounds, in true Bubble fashion. The U.S. stock market dismisses that there could be meaningful ramifications from the unfolding Greek debt crisis. Chinese authorities’ recent determination to restrict mortgage Credit barely garners a headline. And while the Goldman allegations generate great interest and discussion, few believe they will have much general market impact. Financial reform, well, it’s an afterthought when the market is open. Market participants are enamored with the notion that the securities markets and real economy are now conjoined in the initial phase of a big bull cycle.
Count me a subscriber of the “sugar high” thesis. The combination of double-digit (to GDP) deficits, protracted near-zero rates, and the Fed’s unprecedented Trillion-plus monetization has worked wonders. Government stimulus stabilized the Credit system, asset prices, system incomes and economic output. The bulls today believe that a new expansionary cycle has commenced, and fundamentals and prospects couldn’t be much more encouraging from their point of view. Surging stock prices have the optimists disregarding the possibility of a systemic addiction to massive government spending, ultra-low rates, and overabundant marketplace liquidity. Potential issues in the area of risk intermediation are not on the radar screen.
Yet, the sustainability of this recovery will be determined by private sector Credit – eventually. The markets assume private Credit growth will snap back after its long recuperation – as it always has in the past. But, mostly, analysts expend little energy pondering this issue. Deficits of about 10% of GDP, rapid expansion of government-backed Credit (MBS, “build America bonds,” student loans, bank deposits, etc.), and near-zero rates have created a recovery backdrop where minimal private-sector growth has sufficed. This won’t always be the case.
Greek Credit default protection began December at 176 bps. Not many months ago there was little fear of a debt Crisis and no worry of default. Yet here we are today with Greece 2-year debt yielding 11% and annual default protection priced at about 600 bps. Markets fear insolvency and debt restructuring.
The U.S. Treasury borrows these days for three months at 15 bps and for two years at 1.02%. No one dares contemplate how dramatically the world would change if fear injected itself into the equation. While there is certainly more recognition of the structural debt issues confronting our government borrowers (local, state and federal), there is no concern for short-term funding issues. There was an important aspect of the Wall Street/mortgage finance Bubble that receives little attention: The explosion of Credit provided an enormous boost to governmental receipts. Especially in the case of federal debt ratios, boom-related revenues reduced borrowing requirements and distorted debt-to-GDP ratios.
At about 70% of GDP, outstanding Treasury debt is not on the surface overly alarming. Obviously, if one throws in GSE liabilities and the massive future spending obligations related to social security, healthcare, pensions, etc., things are much worse. Yet it is conventional wisdom that the U.S. has the luxury of several years to get its fiscal house in order. And there is today great faith that economic recovery will, as it always does, lead a revival of government receipts and ensure rapidly declining deficits. Count me skeptical. The previous Bubble helped disguise underlying structural debt issues at the state, local and federal levels. Going forward it’s payback time.
…The unfolding Greek debt crisis, China Bubble vulnerability, and more intense scrutiny of Wall Street risk intermediation now work in confluence to increase the probability for a negative surprise in our risk markets. Sure, the equities bulls have become intoxicated by some incredible stock and sector performance. But equity market reflation must be approaching the point of unnerving the bond market. And it can’t help sentiment that, as reported today by CNBC’s Steve Liesman, a rising number of FOMC members support a timely sale of assets and a removal of the Fed’s extraordinary liquidity measures. More bearish fundamentals for the private-sector Credit mechanism gladly ignored by a stock market Bubble.
Some thoughts:
Exactly. We’ve replaced the housing bubble with a government debt bubble, and there’s no way to transition back to private sector-led growth. The amount of debt needed to fuel an economy this unbalanced is simply too great.
Some kind of serious negative event is virtually a lock in the coming year. It might be the spread of Wall Street lawsuits or a PIGS country default. Or the bond market might simply decide it’s eaten enough and get up from the table. No way to know what it will be, but we’ve created the conditions for another nasty “surprise”.
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