The Macro View...and what happens

Will Obama raise taxes on the rich?
Would Romney cut spending and balance the budget?
What about the current deficit cliff-hanger that goes into place at the end of the year cutting defense spending?

There wont be tax increases. There won't be any spending cuts. There won't be any implementation of the ridiculous penalty bill now slated to explode at the end of the year.  Anything that destroys money will push the economy off a cliff.


Here is the mechanism:


1) Spending is cut (or taxes raised)
2) Therefore, less money is in the economy
3) Immediate effect: state, federal, local employees are cut
4) Fewer government goods and services are bought
5) Suppliers of goods and services cut back, go broke, lay-off their employees
6) Businesses those employees supported cut back - fewer trips to restaurant, dry cleaner, Home Depot, fewer new cars bought

7) Economy slows, sliding faster
8) Businesses make "insurance cutbacks", cutting way deeper than needed
9) Economy slides into recession/depression
10) Government receipts decline as tax receipts decline, unemployment, welfare, foodstamps increase
11) Deficits stay the same or get bigger

This cycle will continue until spending increases. Spending will increase if 1) the US spends money or or 2) the US goes to war (ie, the US spends money) or 3) magically private spending increases, ie by increasing personal debt...people HAVE to eat, for example...they will spend for that. And there are LOTS of steps after step 11....the rest of the world follows the US down the shitter since we STILL drive the world economy. For fun I will roll it out a little further...

12) US consumption decline causes collapse in oil prices
13) trade gap diminishes as US exports less
14) Exporters to the US such as China and Germany experience slowdown in economic activity
15) Europe further fucked economically by decline in tourism
16) Auto industry on verge of bankruptcy again as car sales plummet
17) Airlines on verge bankruptcy as travel declines
18) Housing industry collapses because no one is buying or building houses
19) Crime increases out of desperation
20) Railroads idle as they were in 2008 with 1000s of freight cars abandoned
21) Ports and freight yards filled with abandoned tankers, ships and freighters as they were in 2008
22) Personal bankruptcies exploding; Chapter 7 bankruptcies explode (only way to get rid of credit card and student loan debt)
23) More malls become ghost towns
24) Commercial loan failures skyrocket. High rise office towers abandoned
25) Foreign purchase of hard US assets skyrockets: China buy GM or IBM or Microsoft
26) Interest rates pushed to zero across the board in desperate attempt to spur loans and spending
27) Laws passed to force banks to lend and then forgive bad loans
28) Homelessness skyrockets, people living in tents all over America
29) Abandoned vehicles litter roadways as no one can afford insurance, excise, registration or gas, even though gas is about 2 dollars a gallon - or less
30) Environmental regulations increasingly relaxed in attempt to spur manufacturing
31) China goes into recession; Germany in recession; Spain defaults; Italy defaults, Europe in turmoil
32) Russia invades or co-erces many former satellites to rejoin resurgent Russian empire.


Is this extreme? Sure it is. This assumes there is no floor to slowed economic activity when government reduces spending. And herein lies the fear -- ask any Republican how the US got out of the Great Depression and he will say, "World War 2 pulled us out of the Depression". Republicans are CONVINCED that the war saved us. How? By "private industry" suddenly creating millions of new jobs to build tanks, planes and guns. That's the fear. If Romney wins the election and the economy goes into a tailspin, the Republicans till be sorely tempted to go to war with Iran -- because to a Republican, War Means Prosperity. On Nov 2, 2008, VP Candidate Sarah Palin said, "We're in a war with Iran, make no mistake, and when we win, we will kick that war up to full speed and end Iran in 100 days."

But Republicans forget the crucial step of war and "private industry" creating millions of jobs -- the Government is the customer and is buying all that stuff. Spending is spending whether its for bombs or for bridges. The difference is, if you spend to build a bridge, you get a bridge. If you spend to build a bomb you get a useless bomb that sits in a warehouse and has to be guarded. Republicans never seem to grasp this concept.

Make no mistake -- spending ISN'T going down. Taxes ARE NOT going up.

And look -- last week tbill yields hit record lows....everyone is throwing money at us. there is no need to cut spending dramatically. or raise taxes right now. Republicans claim that cutting spending will free up money for industrial investment, a sound economic principle. But even if that worked -- it would take a minimum of a year to START to show impact. And if Romney also follows through with cutting foodstamps, healthcare, social security, welfare and Section 8, it could be years before any positive impact is seen - years of starving children, homeless elderly and so on. And with foreigners throwing money at us, we don't need to do it right now.

I predicted the fed would implement QE3 in June, and they were oh so close but didnt. Bernanke didnt even mention it in July....I doubt he will talk about it in August unless June economic stats are bad. the govt is uneven...housing prices are the highest they have been since 2008. But earnings are slipping. Interest rates are at record lows. but no one is borrowing. and so on. If unemployment starts to go up even a little, then you will see QE3. They will throw money at the consumer. However you can't do that AND keep interest rates low forever. We are going to see big inflation from food prices this fall/winter anyway due to the drought in the midwest (non-existent global warning anyone?) and I expect a warmer than normal winter. The entire Greenland ice cover melted in 4 days last month, though to be fair this appears to be a cyclic event.

Politically, all indicators show Obama as strong favorite to win the election. The RNC and Superpac ads are overwhelming Obama something like 4 to 1 right now, and its worse in swing states. But if Romney wins -- the entire government, all 4 branches, will be in the hands of the Republicans. The US will become like Mexico. It's what they did when Bush was Pres and they will do it again --- absolute power corrupts absolutely. And Romney hasn't had an orignal thought in 20 years. He will be a puppet of the right. And the right wants war with Syria or Iran. War with Syria is a proxy war with Russia. That's one reason we aren't there now. War with Iran means the end of the US as a super-power. We will be a 3rd world nation with a huge army and nothing more, no influence, no power projection, irrelevant. If Obama wins you get two choices -- more of the last 4 years -- OR...bold initiatives that will go nowhere AND scathing rhetoric. A second term President Obama has nothing to lose. He wont have the senate or congress. But he WILL have the Executive Order that allows him to rule like a king for 4 years. At least til 2014 Congress wont have the numbers to impeach him. But he is between a rock and a hard place -- raise taxes or cut spending and send the economy into depression.

No matter what, we are going into depression or recession and we are losing power and influence. For this we can thank Bush. The war with Iraq cost us the future and propelled China to the world stage. They are the new superpower and there will be few who are going to pick the US over the Chinese. The US is nice but China is a brutal enemy with a long memory. The US forgets its friends on a regular basis. Ask Georgia after Bush swore to the living Christ he would protect them from the Russians. Yeah. Ok. It was Czechoslovakia 1968 all over again. This is a constant US pattern. And don't think I'm just condemning Bush -- Obama threw Mubarak under the bus as soon as the opportunity presented itself, despite 30 years of trust and friendship. Mubarak was a brutal despot but so what? He gave us Egypt from the Russians. We COULD have offered him refuge. But we did what Americans do -- use people and nations like our toilet paper.

Things are sliding. It's not because of our debt. On the contrary -- it's because there is not enough Keynesian activity. And as long as we carry the personal debt load we carry it will be hard, oh so hard, for us to recover. Obama knew that it would take something like the internet boom of the 90s for that to happen, and he tried to spark that by investing in Green Technology, but the Chinese undercut our prices, the Germans overrode our technology and the Republicans second guessed the strategy so that hope failed. If we DONT get something like the internet of the 90s again, then America will be a has-been nation in no time at all. Not like Greece, but more like England. Reflecting glory of the past, with flashes of power and brilliance but without the strength to impose its will unless it fires a gun.

The Economics of Disaster

"It is better to be vaguely right than to be precisely wrong."
- William Carr, the "Economic Journal", 1942

My goal is to be at least vaguely right. I spend a great deal of time reviewing the economic pornography that is increasingly available on the internet and subscribe to a number of economic journals, such as "The Economist", which when I was in college studying to be an Economist was a scholarly journal and has devolved over time to tripe.  As a result I am often asked what's going to happen with the US economy and the world as whole. It's an impossible task to get right, so I settle for 'vaguely right'.

Unfortunately, I am willing to bet large sums on my current conclusion that I will be better-than-vaguely right.

Here it is: Despite the encouraging signs in spending, unemployment and growth, the economy is heading for disaster, probably in the June 2012 time frame. I am so certain of this that I have told my accountant to move all of my substantial retirement savings to cash or cash equivalent securities. The stock market is going to fail, probably starting in May.

I hope I am completely mistaken. I want to be so wrong as to be a laughingstock.

But all indications are the opposite.

- SP futures are predicting losses in June
- the ECRI index indicates a declining business cycle and recession by November at the latest
- gas prices continue to rise, which will cripple any recovery
- housing prices continue to fall, and even though they keep falling, few people are buying
- Shiller predicts a large, if not massive, increase in foreclosures over the next few quarters
- velocity of money is at record lows, not just in the US but in Europe and China
- US exports have slowed and as things get worse the dollar will get stronger, making exports harder
- US savings have declined again -- people are buying more on credit

People note that there are encouraging signs also -- the S&P volatility index is low, indicative of growth and I was encouraged by this new news that maybe S&P futures are wrong, but the housing and gas prices are the true bellwether. As long as housing is low and gas is high, people will not spend. We see this in the velocity of money. People are NOT spending. We are heading to deflation despite the huge amount of money treasuries all over the world are printing to prime their economies. We're heading for a cliff and I don't know how far down it is, or even what is at the bottom. But I know it's not good.

People have noted that gold prices have fallen by record amounts. That seems to indicate stability since gold prices are driven by fear and inflation, but the conventional wisdom is that because Ben Bernanke has not mentioned a QE3 at his past 4 Fed meetings that he is either more upbeat about the economy or scared because the Republicans have called him a "traitor". I don't think it's either of those things. I think Bernanke is saving this bullet for when things start to tank over the summer. That's when he will pump a ton of money into the economy in a last gasp to get people spending. Then gold will rise again.

What does it mean? It means people will be pouring money into US bonds. Yields will collapse and it won't matter because even at 0 percent interest, having the same amount of money is better than losing it in the stock market. The dollar will get stronger, thus throttling the US export market, slowing the US economy further. Unemployment rises. Confidence falls. Housing collapses further. GDP shrinks. Recession results.

The economy is NOT going to improve until housing improves. Period. Housing is not going to improve as long as unemployment is high and people are scared.When people have confidence again, they will take risks. When they don't, they don't spend. It's self fulfilling failure. This was the true triumph of Ronald Reagan -- even though he actually made the underlying economics of the US much, much worse, he made people BELIEVE their lives would get better, and when they did, they spent and invested and created prosperity. Unfortunately, they were eating the seed corn of the future, but they didn't know that then. Here's a great quote from the Aeneid by Virgil, 2000 years old and sums up the situation: "Success nourished them. They seemed to be able and so they were able."

The problem is that Reagan and Bush, father and son, have spent all of the future seed corn we would otherwise be spending now to fix our problems. Our debts are way too large now to address the problem. Our options are limited. I will discuss them in tomorrow's blog.

It's important to note a couple of things about gold and this market as well. The big elephant in the room is Iran. Are the Israelis going to bomb Iran? Will the US join them? If any kind of aggressive action of this nature occurs then gold will hit record levels; gas will hit 6 or even 7 dollars a gallon and the US economy will collapse into recession if not complete depression. I don't think there will be an attack, at least not before September. Netanyahu has indicated he will wait a little while longer. President Obama's current sanctions don't fully come into force until July and already the Iranian economy is collapsing. The citizens are angry and new elections have been called. It might be possible that if the Iranian economy does collapse the Iranians will agree that no nukes is better than civil war and starvation. The wild cards are India and China who have agreed to pay gold for Iranian oil regardless. This gets around any Obama sanctions and provides hard currency for the Iranian regime. It also undercuts the US dollar as the reserve currency. This is a major shot over the bow. The US needs to be preparing for a time when the US is NOT the reserve currency, and all that entails -- higher prices for imports, slower economy, less prestige and power over world events. Russia and China are actively trying to make this happen, and I was surprised to see India sign on as well since they are an ally of the US, but the fact is, a crack addict does not make a loyal friend to anyone but the crack dealer and India needs oil badly, and Iran is their friendly crack dealer.

In the end, this will put a 12 - 20 billion dollar pressure on gold. Gold SHOULD respond by mid-summer by going up. It also increases the chances that Israel or the US will bomb Iran with all that entails.

That's all I have to say for today. I want to be wrong.