I have a great deal of time on my hands so I spend it looking at much of the economic pornography on the internet. Faithful readers of my column (ha!) will know that I am bearish on the economy starting late in the second quarter. Bernanke actually confirmed my suspicions yesterday when he said the slow economic growth of the recovery is insufficient to sustain job creation at the rates it's needed. He's telling us the economy is going to crash. He's signalling that Obama is going to lose his re-election bid even though Obama is the 2-to-1favorite in the election. Obama HAS to lose...the Republican Party and their interests are doing everything in their power to insure the economy fails. It's the only way the Republicans can win. For example, for the first time since 1958 the Highway Appropriations Bill is being killed by Republicans. This almost 400 Billion dollar bill is the closest thing we come to real shovel-ready stimulus and is used every year, without controversy, to maintain the nations highway infrastructure. It puts hundreds of thousands to work, not to mention the commerce it creates in resource development, transport, manufacturing and so forth. Why would this Bill suddenly become controversial for the first time in decades? Because stalling it makes unemployment higher. If unemployment is high, people will vote Republican. As for Republican interests, there is a rumor on the internet that the oil industry is rapidly raising gas prices to crash the economy. Again, a weak economy favors the Republicans. You can look at the March release of Exxon-Mobil's earnings and see they reported record profits. This gives credence to the theory that that want Obama to fail and will kill the economy to accomplish it.
In any case, this posting is not about that really, it's about sources I use to glean information. I want to provide my source data so that people don't think I am a whiny naysayer with no information to back up my conclusions. I draw my conclusions from vast pool of data. I could be wrong in them. I actually want to be wrong right now because I conclude that we're essentially fucked, that the economy is going to tank very soon and that the extreme right will as a result control all branches of government, which will be a disaster for America.
So here is a list of the sources I use:
The Baseline Scenario -- a pair of MIT economic scientists try to put a "fun" spin on their economic predictions. Their reports are long and often boring but their conclusion is that we are fucked.
The Big Picture -- Barry Ritholtz is a God...he puts together the most interesting consolidation of facts, graphs, reading materials, suggestions and conclusion of anyone on the net. He is cynical, but he's not partisan. He only cares about facts, even tiny funny ones. He's my go - to guy
Credit Writedowns - for big picture gloom and doom nothing beats Ed Harrison. This guy is on the ball. He's called it right in Greece forever. I like reading his columns but I hate how he changes his web site presentation so frequently
NBER - I am actually a subscriber to the National Bureau of Economic Research, so they email me government reports and raw data on daily basis. Most of it is too technical for me, but some of the reports come in even before or at the same time as the newspapers get the info, so I know what is coming
Case-Shiller - I've seen Shiller speak. He sucks. But he's got good data and these guys know what is happening and what is happening is that we're fucked. Their conclusion yesterday "We probably won't see housing recover in our lifetimes." Did I happen to mention that we're fucked?
Kitco - this is a gold/silver price site. They also provide "gold bug" info for nutjobs and whackjobs who stockpile gold and silver. Sometimes a broken clock is right and unfortunately so are the nutjobs. I'm not sure what gold and silver will do over the next six months because of deflation and/or Iranian war concerns, so I rarely recommend it anymore. But if you bought in the early 2000s like I did -- you're in the money!
ECRI -- economic research council. These guys are so good they scare the bejeesus out of me. Their conclusion -- we're fucked by summer. I was pleased and saddened that I came to the same conclusion before they printed their report. http://www.ritholtz.com/blog/2011/05/ecri-global-slowdown-to-hit-by-summer/
The Economist Magazine -- this magazine takes a world-wide view of what's going on. Sometimes they are too broad, sometimes they are too technical, sometimes they think they are being witty when they are just being stupid but for the most part, you can't get a better condensation of the entire worldwide picture than from this mag. Kudos!
CarpeDiem (http://mjperry.blogspot.com) this economist focuses on good news but he also has lots of great charts and graphs.
The CIA World Factbook -- whenever something starts to heat up around the world, it's good to know the basics. Getting facts about Syria or Iran, for example, helps you understand what we would face as the result of any action we take. It's too bad George W. Bush can't read or this book might have prevented the foolish Iraq war.
Wikipedia -- that's right, Wikpedia -- for concepts, stats and global understanding, Wikipedia provides and excellent background.
Political Calculations -- it's a site for Congress and is designed to provide trendy facts and articles at your fingertips. It's totally in the tank for the Republicans and gleefully reports bad news and info that hurts the president, but the links and charts are valuable and insightful.
NPR - yes, I listen to NPR almost 7/24. I actually had to stop listening because it was becoming an obsession. But as far as news coverage -- there is almost no where else you can go to get the in-depth story. "On Pointe" might be the best news show on air anywhere and "Talk of the Nation" can not be underestimated.
Some people say, what about the WSJ? Or IBD? I do occassionally look at these sources but they are so rabidly to the right that the info they espouse is little more than propaganda. Don't forget -- Fox News sued the FCC for the right to lie to, and deceive, its viewers while delivering the "news" -- and won! They argued the First Amendment does not require them to tell the truth. This is why Fox is banned in Canada, and the WSJ is owned now by Rupert Murdoch. How can anyone trust anything it says anymore? It's too bad -- it's journalism was at one time the world standard.
So that's what I use to draw conclusions. All are welcome and encouraged to examine these sites. If you can only pic one, look at The Big Picture.
Wednesday, March 28, 2012
Friday, March 23, 2012
Bird and Son
I was expected up in Ed's office, so I marched upstairs. He came to his office door himself to show me in. Not a good sign. His office was large and well-appointed. There was a large oil painting of his father behind the big oaken desk and through the massive windows I got a birds-eye view of the entire plant.
"Jake, I have bad news," he said, "Bird and Son is closing its doors today."
I couldn't speak.
"We lost 20 million dollars last year," he said to me, "We can't do this anymore. The industry is changing. Cheap paper from down south has really got us behind the eight ball."
"How much of the plant will be affected?" I asked.
"All of it," he said quietly.
Twenty seven years I worked at that mill. I loved that place. When truckloads of product pulled out I felt proud -- all those products with our logo on them. We had been the industry standard for over 100 years. But no more. The rest was anti-climax. Ed stood on a large box in the warehouse. He was shaking as he explained the situation. No one said a word. All the machines that kept a factory alive were all still working and those were the only sounds now. I couldn't remember another time when I was in this factory without hearing the pounding of tools, the swearing of workmen, the sound of production. Now all I could hear was the death rattle of a dying factory.
I was the one assigned to shut it all down. The rollers were still taking up new paper. Meters on every wall monitored every stage. Just two hours ago it would have been a firing offense to interrupt operation and yet here I was pulling the switches to power it down. The pumps stopped. The rollers stopped. The big dryers and fans stopped. The only sound was of dripping water. Alarm lights were tripping all over the plant. The paper on the line was ruined. I cried like a baby.
That was twenty years ago. When the mill died, the town died too. There are still rows of empty and dusty storefronts lining the streets across from the mill ruins. Property values collapsed, housing was abandoned. A chain link fence rings the entire park. Looters have gone through the empty buildings many times. The parking lots are filled with piles of demolition waste and old tires. Homeless drunks live inside now. The walls are covered with graffiti.
Someday someone will torch the place. That’s what happens to old mills. No one sees the value of what they once were. There won’t be any books about how this place once provided a community with its livelihood. There’s no future for this place and no future for people like me either. Things are so different now. Plants are made of corrugated tin or cinderblock, thrown up in a few weeks, torn down on a whim. Companies come and companies go but the employees don’t appreciate how their life and their happiness can come from doing the work and not just the work, but in the life they make there, even on the bad days when the politics and the cheapness make it hard to come in. In the end, however, when they look back, they remember the friendships they made and the privilege of accomplishing something that mattered.
Wednesday, March 21, 2012
Summary of 2012 Election Predictions as of March 21, 2012
With just eight months to go to the 2012 Presidential Election the picture is becoming clearer. While anything can happen, it seems Mitt Romney will be the Republican candidate and will face, of course, Barack Obama for the Presidency. Many factors will impact the result of the election, and I believe this election is pivotal for the direction of the world. I have looked around the internet for predictions of who will win. In my opinion, the absolute best indicators of who will win an election are the Irish betting sites, like Paddy's Power and Intrade and Betfair. These sites require people to put their money where their mouth is, not just a pointless guess. People who actually put up money tend to be more correct than people who guess with their heart. These sites prove to be amazingly correct. In all cases, they have Obama winning over Romney by a margin of 2 to 1.
Obviously, anything could happen. The Republicans are famous for dirty tricks and this year is no different. In 2000 Kathleen Harris put 400,000 innocent Black men on the Felon List, preventing them from voting. Statistically speaking, Gore would have crushed Bush had these men been able to vote. In 2004, Ken Blackwell, working with the White House, insured that Blacks in Ohio either couldn't find the polls, or were forced to wait for hours in the rain, or were provided broken voting machines and that polls in Black districts closed much earlier than those in White districts. Now, in 2012, the Republicans have tried to break up big electoral vote states like Pennsylvania and California (but not Texas); they are requiring voter IDs to prevent the poor, blacks and the elderly (who tend to vote Democrat) from voting and have changed poll locations and times in areas where Democrats tend to vote. Will these things impact the election? Election watchers suggest a 2 percent difference in voting results as the result of these dirty tricks. What will they do in the future? As way of disclaimer, I must admit that I am registered Republican and have been since 1980. More's the pity.
I will update this at various times as the election approaches.
Nevertheless the round-up of various election prediction sites have Obama winning in 2012 probably with 303 Electoral Votes.
Summary: Of the 22 Election Predictors polled, including betting sites, statisticians, pollsters, bizarre indicators and more, 18 of the sites predict Obama will win the election while 4 of the sites predict that Romney will win the election.
Here is the round up of the predictions and sites:
Obviously, anything could happen. The Republicans are famous for dirty tricks and this year is no different. In 2000 Kathleen Harris put 400,000 innocent Black men on the Felon List, preventing them from voting. Statistically speaking, Gore would have crushed Bush had these men been able to vote. In 2004, Ken Blackwell, working with the White House, insured that Blacks in Ohio either couldn't find the polls, or were forced to wait for hours in the rain, or were provided broken voting machines and that polls in Black districts closed much earlier than those in White districts. Now, in 2012, the Republicans have tried to break up big electoral vote states like Pennsylvania and California (but not Texas); they are requiring voter IDs to prevent the poor, blacks and the elderly (who tend to vote Democrat) from voting and have changed poll locations and times in areas where Democrats tend to vote. Will these things impact the election? Election watchers suggest a 2 percent difference in voting results as the result of these dirty tricks. What will they do in the future? As way of disclaimer, I must admit that I am registered Republican and have been since 1980. More's the pity.
I will update this at various times as the election approaches.
Nevertheless the round-up of various election prediction sites have Obama winning in 2012 probably with 303 Electoral Votes.
Summary: Of the 22 Election Predictors polled, including betting sites, statisticians, pollsters, bizarre indicators and more, 18 of the sites predict Obama will win the election while 4 of the sites predict that Romney will win the election.
Here is the round up of the predictions and sites:
1. Intrade Prediction Map
Electoral Votes: Republican 104 Democrat 292 Toss-up 142
2. Alan Lichtman Analysis
Predicts Obama to Win
3. The Signal Forecast
http://news.yahoo.com/blogs/signal/obama-poised-win-2012-election-303-electoral-votes-202543583.html
The Signal is a Yahoo News publication.
4. Newsvine
http://matt-rock.newsvine.com/_news/2011/04/06/6419002-my-early-2012-election-predictions
Predicts full Democrat sweep of Senate, Congress and White House
This is a news blog where users can write in. To be honest, the author seems totally in the bag for Democrats.
5. Larry J. Sabato
Based on Alan Lichtman’s analysis, predicts Democrats to win White House
This man is a statistician and predictor formerly associated with the Princeton Election Consortium.
6. James Zogby
Zogby is a popular polling agency. Based on the work of Alan Lichtman, Zogby predicts Obama to win White House. Typically, Zogby is in the bag for Republicans.
7. Youtube Matchup
Examines almost every scenario in a match up between Romney and Obama. Obama wins almost every time. Conclusion is that Republicans should focus on keeping the House and forget about the Presidency
8. Gallup Trial Poll
Romney beats Obama by 2 percent
9. Rasmussen Reports
Typically in the bag for Republicans, Rasmussen has Obama winning the Presidential election in 2012
10. The November 6 Rule
No incumbent has ever won re-election on elections held on Nov 6. This indicates Romney will win.
11. The 7 Percent Unemployment Rule
Only Roosevelt and Reagan have won re-election with unemployment rates higher than 7 percent. At it’s best, unemployment in November will be 7.6 percent
12. Famous Mexican Tarot Card Reader
Predicts Obama will lose the election. Does not predict who will win.
13. Nate Silver, 538.com
Nate Silver is a famous statistical prognosticator. He works at the NYT and has the well-respectedd political site 538.com. Predicts Obama’s chances for winning the 2012 election are much better than the Republicans.
14. The Superbowl Prediction
The Superbowl is a good predictor of who will win the Presidential election. If the AFC wins, then the Republican is the President. If the NFC wins, then the Democrat is the winner. The NFC won this year predicting Obama as the winner.
15. Time Magazine
Time Magazine predicts Latinos will have make the deciding factor for the election and suggest Obama has the edge
16. Annals of Improbable Research
This scientific study by two renowned mathematicians suggest Obama has a 69% probability of winning the election in 2012.
17. Paddy’s Power Betting Site
Has Obama’s odds of winning at roughly 2 to 1 with 308 Electoral Votes. Romney’s chances are handicapped at roughly 2 to 1 against him.
18. Intrade Betting Site
With about 300000 bettors participating, Intrade gives Obama a 60 percent chance of winning; Romney has a 38 percent chance of winning.
19. Election Projection Site
Gives Obama the election with 303 Electoral votes
20. Freakonomics Statistician Justin Wolfers
Justin Wolfers who crunches numbers for a living at Princeton and the U of Penn predicts Obama will win the election and the Republicans will hold the Congress and Senate.
21. Stock Market Performance
http://www.lightspeed.com/index.php?page_id=13515
Stock Market Performance in the year preceding an election is a fair predictor of the winner of the election. In this case, the Stock Market predicts Obama will win.
22. Betfair
Betfair, a popular Irish betting site, has Obama winning the election 2 to 1 versus Romney, giving Obama about a 65 percent chance and Romney about a 30 percent chance of winning.
Sunday, March 18, 2012
Should Iran Be Bombed?
There's a great scene in the movie "True Romance" where Christopher Walken says to Dennis Hopper, who is tied to his chair, "Do you see this fist?" and Hopper looks at his closed fist. Then Walken slams him with his other fist and says, "This is the one you need to be watching for."
Anytime a magician tells you to look somewhere it's because he's doesn't want you to look somewhere else. It's called "ledgerdemain", or "sleight of hand". The problem with Iran is similar to this. Iran is a problem. As I write this, the Justice Department is handing down indictments to a long list of former high ranking Democrats and Republicans like Ed Rendell and Tom Ridge for trying to get a known Iranian terrorist group off the terror watch list. It seems they were paid lobbyists for this group. Looks bad. But you have to ask yourself -- would Tom Ridge, of all people, the first head of the Department of Homeland Security, actually take money from a group he believed to be a danger to the US? It doesn't seem likely. It DOES seem likely that these political whores would take money but maybe that's just the cynic in me.
How does this tie into bombing Iran? The question really is, would we be better off after we bombed Iran?
I have to believe that the Army has been planning how to take down Iran since 1979. What do we know about Iran?
- it's
Anytime a magician tells you to look somewhere it's because he's doesn't want you to look somewhere else. It's called "ledgerdemain", or "sleight of hand". The problem with Iran is similar to this. Iran is a problem. As I write this, the Justice Department is handing down indictments to a long list of former high ranking Democrats and Republicans like Ed Rendell and Tom Ridge for trying to get a known Iranian terrorist group off the terror watch list. It seems they were paid lobbyists for this group. Looks bad. But you have to ask yourself -- would Tom Ridge, of all people, the first head of the Department of Homeland Security, actually take money from a group he believed to be a danger to the US? It doesn't seem likely. It DOES seem likely that these political whores would take money but maybe that's just the cynic in me.
How does this tie into bombing Iran? The question really is, would we be better off after we bombed Iran?
I have to believe that the Army has been planning how to take down Iran since 1979. What do we know about Iran?
- it's
Saturday, March 17, 2012
Greece, Europe, the US and Options for Dealing with Debts
I don't care who you are, a Republican or a Democrat, an American or a European. There is a limited number of things that anyone can do about debt, deficit and growth. Right now Greece is the sacrificial lamb for German and French bankers as they try to save their skins, but they are doing Greece no favors and Greece is its own worst enemy and always has been.
Here are the FACTS:
There are only 5 ways to lower or eliminate the deficit:
1) Cut spending.
2) Raise taxes.
3) Grow the economy.
4) Induce inflation.
5) Default selectively or totally on the debt forcing a balanced budget.
Also remember that DEBT and DEFICIT are 2 different things. The deficit is the difference between what we take in for taxes and what we spend, running in the US right now about 1.2 trillion per year. The debt is all those deficits added up, year after year. The debt is about 15 trillion dollars right now, and it's the INTEREST on that debt that really hurts us. Right now, it's probably the number 2 biggest item behind Defense spending, and it grows every year, meaning less money for highways, tanks, airports, customs inspectors, FBI, etc, etc,
Chart 1: US Budget Line Items for 2012
Interest on the debt is about 400 billion dollars and is included in "All Other Government Spending". This number goes up alot every year. Ask yourself...what could the US do with an additional 400 billion dollars every year?
Option 1: Cut Spending
This is the ONLY option of the Republicans. They somehow think that by cutting spending they are going to make the economy grow. Here's a reality check for you -- DO YOU SEE ANY GROWTH AT ALL IN GREECE??? Do you even FORESEE any growth in Greece in the near future? The devil is in the details. Cutting spending would be like throttling down the engine on your car. You would go slower. Sometimes you stall. This is the problem with cutting spending. Every dollar you cut means fewer jobs. If we cut our 1 trillion dollar deficit next year, for example, it would probably mean the loss of something like 10 million jobs. Does anyone REALLY think the Republicans would ever do this? If we lost 10 million jobs it would make the Great Depression look like a small divot. They are LYING when they say they will cut spending. Especially if they go to war with Iran. You can see this in Greece today. One of the goals of "austerity" is to drive the Greeks towards a balanced budget. We see the results on the news every night -- high unemployment; lost pensions; rising fees; riots. And the US could pay all of Greece's debts and hardly even notice it -- what do you think would happen if WE had to suddenly balance the budget??? It would be the end of the world as we know it. Drug addicts often die when they quit cold turkey.
Option 2: Raising Taxes
Raising taxes is the Democrat's plan. At least they always seem to get the reputation for this. -- in Keynesian terms, raising taxes is the same thing as "destroying money". When you destroy money, it slows the economy. The current economy is going so slowly now that if we slow it anymore it will go backwards, ie, recession. That means lost jobs. That's why the Democrats only want to raise taxes on the rich. They have money and don't spend it. It impacts the economy less.And don't believe the hype about taxing the rich "kills the job creators". About 75 percent of the jobs in the US are created by companies with 50 employees or less. Those companies are started and run, by and large, by POOR PEOPLE. And if the rich were creating soooo many jobs, why was job creation under George W. Bush the worst since the depression? (You can look these facts up on Wikipedia under "Jobs created during U.S. presidential terms. And don't give me any shit about using Wikipedia as a source).
3. Growing the Economy
Growing the economy allows you to generate more revenues on the existing tax structure. It was this, more than anything else, that helped Clinton balance the budget in the 90s. The government was taking in tax receipts hand over fist. This is the double edged sword of the recession -- not only do you have to pay more in welfare and foodstamps, but you are getting LESS in tax revenues. Ouch.
But growing the economy is hard to do. How do you "grow the economy"? You'd have to have another major change like the internet boom, or remove SOX rules for entrepreneurs...or create another major bubble in housing. Note that this is what the Japanese tried and failed at...they had NEGATIVE interest rates for awhile (that is, if you took a loan, they paid YOU money instead of you paying interest) and it still didn't work. Growth really worked for the US after WW2 but we don't have the Manufacturing economy we once did. This is the reason the Fed pumps money into the economy...the hope is that by making money available, people will spend and spending will lift the economy, the same way priming your lawnmower with gasoline gets it to start faster. Right now it's not really working so well.
4. Inflation
Induce Inflation -- inflation makes old debt cheap. This is why George W. Bush brought Ben Bernanke onto the Fed in the first place. Bernanke is a big fan of inflation and Bush was running huge deficits. Bush's plan was to inflate as much of the debt away as possible. This would have had two benefits -- it would make the debt less valuable (and dangerous) and it would screw the Chinese to whom Bush was secretly selling the US to the tune of 3 trillion dollars. Until Bernanke became Chairman, inflation in the US was miniscule less than 1 percent during the entire Clinton administration...during the entire Bush years, it ran at 3 - 5 percent, which is huge for the US and contrary to the goals of the Fed since the 1980s. Each percentage point of inflation "destroyed" billions in dollar value. It was like getting "free" money from the Chinese and the Arabs. On the other hand, when you are the world's reserve currency and people look to you for stability, why would you piss off your creditors that way?
Now we are suffering from the possibility of Deflation, which is even worse. Deflation means a dead economy...prices keep dropping but no one buys anything because they think it will be cheaper next week. Note that the Fed has dumped trillions of fake dollars into the economy and yet inflation is still low. This is a really bad sign. (Note, oil prices don't count here, there are other factors). Look at Housing -- prices are at 1990s levels (according to "Chart of the Day" ) and interest rates are at the lowest levels they have ever been -- AND NO ONE IS BUYING!!!! (Actually lots of people are buying, people with cash. Now is the time when people with cash and nerves of steel get rich beyond their wildest dreams).
Chart One: Holders of US Debt
Holder Amt ($T) Percent
5. Default
Default - when the government defaults it says it will not honor its debts. The problem with this is that 75 percent of all US debt is owned by Americans and American institutions such as 401K, pension plans, banks and corps, individuals and governmental departments. So defaulting REALLY screws up Americans. Selectively defaulting -- for example, saying we just won't pay back the Chinese, is an ACT OF WAR. There would be serious repercussions for doing that. The Chinese have been selling off US debt for just this eventuality. They were holding as much as 3 trillion in 2008 but latest reports indicate they have much less than 2 trillion now. And look who else as stopped buying US debt -- Japan. They were the number 4 purchaser of US debt. Now they buy Chinese debt. ARE ALARM BELLS RINGING ANYWHERE? Note that in October 2007 a catastrophe occurred in the US little noticed by anyone. This was the first time in US history that no foreign governments purchased ANY US debt. The world was sending George Bush a signal to cut the debt. He didn't listen. There's another thing that is EXTREMELY interesting to note -- in 2000, when George W. Bush was elected, England was the number one or two holder of US debt, holding about 500 billion dollars in debt. By the time Bush left office, England had sold off all but 50 billion dollars of US debt. They had so little confidence in the Bush Administration that they sold off all our debt. That speaks volumes. The question comes, then, what does England think of the Obama Administration? In the years since Obama was elected, England is back to holding about 430 Billion dollars. They put their money where their mouth is.
In any event, once you default, it means you MUST balance your budget because no one will loan you money anymore or if they do, it will be at extremely high rates (look at Greece -- they had 5 year rates as high as 162 percent). So defaulting is a drastic step that cleans your slate and prepares you for the future, but it also puts the country into steep, steep decline, a great depression and lots of misery. No highways, no school funding, cut down military, no OSHA, no food inspectors, no parks, no rails, no airports, etc, etc. You would only do that as a last resort. You can actually see this happening in slow motion in Greece today -- that's why they are rioting, although their riots are pointless...you can't make it rain blood. You have to suck it up and prepare for tough times and a better future.
In actuality, it's a shame what the EU is doing to Greece, and all for a few French and German bankers. Greece NEEDS to default. Greece NEEDS to leave the EU for awhile. They are small enough that they don't matter and once the initial pain is accepted, they can grow again, and if they fix their miserable and corrupt books and tax system, they can rejoin the EU in 10 years or so. What's happening to Greece now is a travesty and only means they will be revisiting default again with 5 years at the most. Let the poor bastards default and get it over with.
So those are the basics.
So what WILL happen in the US? Ideally, spending WILL be brought under control...next year's budget is supposed to show a 900 billion dollar deficit...really bad, but still better than last year's budget deficit at 1.5 trillion. If the economy picks up steam (and it won't), the extra revenue from that growth will help. If we tax the rich a little more (and we won't), that will help too. But we will be seeing AT LEAST 500 billion dollar deficits for the forseeable future.Doesn't matter who is elected.
What does it mean?
It's the end of American supremacy. Syria is a case in point. America no longer has the financial muscle to accomplish great tasks. China, India and Russia can brush us aside. We are still enormously powerful, but we are no longer a "super power". We just think we are, but that's because the real super powers, the ones with real money, let us think that way. It's to their advantage. For now.
What will happen in the near term?
"By raising the price of gasoline we can cause the Obama re-election campaign to fail"
- anonymous oil industry executive, "Energy Industry News", July 2011
The US economy is growing slowly, but it will collapse in the June time frame. The stock market will collapse and S&P earnings are already projecting losses for the June report. The rapid rise in the price of gas is attributable to many things, not least is that oil companies want Obama to lose the election in the fall, but it is irrelevant -- the rise in the price of gas is the single biggest cause of recession and collapse of the economy. Gasoline has more power than the government to create or destroy money because it acts faster than the government can. The only tool the government has to counter it is to force higher MPG or encourage non-oil energy, and that is very slow and subject to the laws of and limits of physics.
Be prepared. You want to start moving your money out of ETFs, mutuals and the stock market into cash funds, US bond funds and gold. Bond funds will drop in yields but the money is safe. Gold is probably going to rise...a huge symbol of US power deterioration is that India and China have decided to go around the US and buy Iranian oil and pay...IN GOLD. By doing this they not only weaken the US further, they give Iran hard currency (gold), and show they don't care about the US or Iran's atom bomb...and it puts 20 billion dollars of pressure on Gold prices. But gold is volatile. Bonds are not. If we do attack Iran -- gold will be untouchable.
What SHOULD we do?
We should do all of (1 - 4) above but not default. There is no political will to make it happen but we have to cut spending faster than we are; we have to raise taxes, probably on everyone, not just the rich; we have to invest in something that might promise amazing growth, like space travel, fast rail or water infrastructure, and we have to let natural inflation do its job. We would have to bite the bullet and accept that the US is going to be weak for about 10 years. We have to cut entitlements and pensions and put limits on imports to foster manufacturing here. We would have to force savings and punish credit card purchasing. We have to eliminate college loans and create really cheap mortgage rates, like 1.5 percent, to induce house buying and refinance. If we forced every homeowner in America to refi at 2 percent for 30 years, not only would the recession be over but we would be back in boom times. This is of course, just opinion.
That's the report for today. Bet you are sorry you asked.
Here are the FACTS:
There are only 5 ways to lower or eliminate the deficit:
1) Cut spending.
2) Raise taxes.
3) Grow the economy.
4) Induce inflation.
5) Default selectively or totally on the debt forcing a balanced budget.
Also remember that DEBT and DEFICIT are 2 different things. The deficit is the difference between what we take in for taxes and what we spend, running in the US right now about 1.2 trillion per year. The debt is all those deficits added up, year after year. The debt is about 15 trillion dollars right now, and it's the INTEREST on that debt that really hurts us. Right now, it's probably the number 2 biggest item behind Defense spending, and it grows every year, meaning less money for highways, tanks, airports, customs inspectors, FBI, etc, etc,
Chart 1: US Budget Line Items for 2012
Interest on the debt is about 400 billion dollars and is included in "All Other Government Spending". This number goes up alot every year. Ask yourself...what could the US do with an additional 400 billion dollars every year?
Option 1: Cut Spending
This is the ONLY option of the Republicans. They somehow think that by cutting spending they are going to make the economy grow. Here's a reality check for you -- DO YOU SEE ANY GROWTH AT ALL IN GREECE??? Do you even FORESEE any growth in Greece in the near future? The devil is in the details. Cutting spending would be like throttling down the engine on your car. You would go slower. Sometimes you stall. This is the problem with cutting spending. Every dollar you cut means fewer jobs. If we cut our 1 trillion dollar deficit next year, for example, it would probably mean the loss of something like 10 million jobs. Does anyone REALLY think the Republicans would ever do this? If we lost 10 million jobs it would make the Great Depression look like a small divot. They are LYING when they say they will cut spending. Especially if they go to war with Iran. You can see this in Greece today. One of the goals of "austerity" is to drive the Greeks towards a balanced budget. We see the results on the news every night -- high unemployment; lost pensions; rising fees; riots. And the US could pay all of Greece's debts and hardly even notice it -- what do you think would happen if WE had to suddenly balance the budget??? It would be the end of the world as we know it. Drug addicts often die when they quit cold turkey.
Option 2: Raising Taxes
Raising taxes is the Democrat's plan. At least they always seem to get the reputation for this. -- in Keynesian terms, raising taxes is the same thing as "destroying money". When you destroy money, it slows the economy. The current economy is going so slowly now that if we slow it anymore it will go backwards, ie, recession. That means lost jobs. That's why the Democrats only want to raise taxes on the rich. They have money and don't spend it. It impacts the economy less.And don't believe the hype about taxing the rich "kills the job creators". About 75 percent of the jobs in the US are created by companies with 50 employees or less. Those companies are started and run, by and large, by POOR PEOPLE. And if the rich were creating soooo many jobs, why was job creation under George W. Bush the worst since the depression? (You can look these facts up on Wikipedia under "Jobs created during U.S. presidential terms. And don't give me any shit about using Wikipedia as a source).
3. Growing the Economy
Growing the economy allows you to generate more revenues on the existing tax structure. It was this, more than anything else, that helped Clinton balance the budget in the 90s. The government was taking in tax receipts hand over fist. This is the double edged sword of the recession -- not only do you have to pay more in welfare and foodstamps, but you are getting LESS in tax revenues. Ouch.
But growing the economy is hard to do. How do you "grow the economy"? You'd have to have another major change like the internet boom, or remove SOX rules for entrepreneurs...or create another major bubble in housing. Note that this is what the Japanese tried and failed at...they had NEGATIVE interest rates for awhile (that is, if you took a loan, they paid YOU money instead of you paying interest) and it still didn't work. Growth really worked for the US after WW2 but we don't have the Manufacturing economy we once did. This is the reason the Fed pumps money into the economy...the hope is that by making money available, people will spend and spending will lift the economy, the same way priming your lawnmower with gasoline gets it to start faster. Right now it's not really working so well.
4. Inflation
Induce Inflation -- inflation makes old debt cheap. This is why George W. Bush brought Ben Bernanke onto the Fed in the first place. Bernanke is a big fan of inflation and Bush was running huge deficits. Bush's plan was to inflate as much of the debt away as possible. This would have had two benefits -- it would make the debt less valuable (and dangerous) and it would screw the Chinese to whom Bush was secretly selling the US to the tune of 3 trillion dollars. Until Bernanke became Chairman, inflation in the US was miniscule less than 1 percent during the entire Clinton administration...during the entire Bush years, it ran at 3 - 5 percent, which is huge for the US and contrary to the goals of the Fed since the 1980s. Each percentage point of inflation "destroyed" billions in dollar value. It was like getting "free" money from the Chinese and the Arabs. On the other hand, when you are the world's reserve currency and people look to you for stability, why would you piss off your creditors that way?
Now we are suffering from the possibility of Deflation, which is even worse. Deflation means a dead economy...prices keep dropping but no one buys anything because they think it will be cheaper next week. Note that the Fed has dumped trillions of fake dollars into the economy and yet inflation is still low. This is a really bad sign. (Note, oil prices don't count here, there are other factors). Look at Housing -- prices are at 1990s levels (according to "Chart of the Day" ) and interest rates are at the lowest levels they have ever been -- AND NO ONE IS BUYING!!!! (Actually lots of people are buying, people with cash. Now is the time when people with cash and nerves of steel get rich beyond their wildest dreams).
Chart One: Holders of US Debt
Holder Amt ($T) Percent
FRS 6.328 46
China 1.132 8.3
Citizens 1.107 8.1
Japan 1.038 7.6
US Pension Funds .8423 6.2
US Mutual Funds .6535 4.8
US State/Local Gov .4844 3.6
UK .4294 3.2
US Banks .2824 2.1
US Insurance Co .2501 1.9
All other funds 1.000 7.4
China 1.132 8.3
Citizens 1.107 8.1
Japan 1.038 7.6
US Pension Funds .8423 6.2
US Mutual Funds .6535 4.8
US State/Local Gov .4844 3.6
UK .4294 3.2
US Banks .2824 2.1
US Insurance Co .2501 1.9
All other funds 1.000 7.4
All US Held by Percent: 74%
Foreign Held: 26%
Foreign Held: 26%
Source: http://finance.yahoo.com/news/biggest-holders-of-us-gov-t-debt.html
5. Default
Default - when the government defaults it says it will not honor its debts. The problem with this is that 75 percent of all US debt is owned by Americans and American institutions such as 401K, pension plans, banks and corps, individuals and governmental departments. So defaulting REALLY screws up Americans. Selectively defaulting -- for example, saying we just won't pay back the Chinese, is an ACT OF WAR. There would be serious repercussions for doing that. The Chinese have been selling off US debt for just this eventuality. They were holding as much as 3 trillion in 2008 but latest reports indicate they have much less than 2 trillion now. And look who else as stopped buying US debt -- Japan. They were the number 4 purchaser of US debt. Now they buy Chinese debt. ARE ALARM BELLS RINGING ANYWHERE? Note that in October 2007 a catastrophe occurred in the US little noticed by anyone. This was the first time in US history that no foreign governments purchased ANY US debt. The world was sending George Bush a signal to cut the debt. He didn't listen. There's another thing that is EXTREMELY interesting to note -- in 2000, when George W. Bush was elected, England was the number one or two holder of US debt, holding about 500 billion dollars in debt. By the time Bush left office, England had sold off all but 50 billion dollars of US debt. They had so little confidence in the Bush Administration that they sold off all our debt. That speaks volumes. The question comes, then, what does England think of the Obama Administration? In the years since Obama was elected, England is back to holding about 430 Billion dollars. They put their money where their mouth is.
In any event, once you default, it means you MUST balance your budget because no one will loan you money anymore or if they do, it will be at extremely high rates (look at Greece -- they had 5 year rates as high as 162 percent). So defaulting is a drastic step that cleans your slate and prepares you for the future, but it also puts the country into steep, steep decline, a great depression and lots of misery. No highways, no school funding, cut down military, no OSHA, no food inspectors, no parks, no rails, no airports, etc, etc. You would only do that as a last resort. You can actually see this happening in slow motion in Greece today -- that's why they are rioting, although their riots are pointless...you can't make it rain blood. You have to suck it up and prepare for tough times and a better future.
In actuality, it's a shame what the EU is doing to Greece, and all for a few French and German bankers. Greece NEEDS to default. Greece NEEDS to leave the EU for awhile. They are small enough that they don't matter and once the initial pain is accepted, they can grow again, and if they fix their miserable and corrupt books and tax system, they can rejoin the EU in 10 years or so. What's happening to Greece now is a travesty and only means they will be revisiting default again with 5 years at the most. Let the poor bastards default and get it over with.
So those are the basics.
So what WILL happen in the US? Ideally, spending WILL be brought under control...next year's budget is supposed to show a 900 billion dollar deficit...really bad, but still better than last year's budget deficit at 1.5 trillion. If the economy picks up steam (and it won't), the extra revenue from that growth will help. If we tax the rich a little more (and we won't), that will help too. But we will be seeing AT LEAST 500 billion dollar deficits for the forseeable future.Doesn't matter who is elected.
What does it mean?
It's the end of American supremacy. Syria is a case in point. America no longer has the financial muscle to accomplish great tasks. China, India and Russia can brush us aside. We are still enormously powerful, but we are no longer a "super power". We just think we are, but that's because the real super powers, the ones with real money, let us think that way. It's to their advantage. For now.
What will happen in the near term?
"By raising the price of gasoline we can cause the Obama re-election campaign to fail"
- anonymous oil industry executive, "Energy Industry News", July 2011
The US economy is growing slowly, but it will collapse in the June time frame. The stock market will collapse and S&P earnings are already projecting losses for the June report. The rapid rise in the price of gas is attributable to many things, not least is that oil companies want Obama to lose the election in the fall, but it is irrelevant -- the rise in the price of gas is the single biggest cause of recession and collapse of the economy. Gasoline has more power than the government to create or destroy money because it acts faster than the government can. The only tool the government has to counter it is to force higher MPG or encourage non-oil energy, and that is very slow and subject to the laws of and limits of physics.
Be prepared. You want to start moving your money out of ETFs, mutuals and the stock market into cash funds, US bond funds and gold. Bond funds will drop in yields but the money is safe. Gold is probably going to rise...a huge symbol of US power deterioration is that India and China have decided to go around the US and buy Iranian oil and pay...IN GOLD. By doing this they not only weaken the US further, they give Iran hard currency (gold), and show they don't care about the US or Iran's atom bomb...and it puts 20 billion dollars of pressure on Gold prices. But gold is volatile. Bonds are not. If we do attack Iran -- gold will be untouchable.
What SHOULD we do?
We should do all of (1 - 4) above but not default. There is no political will to make it happen but we have to cut spending faster than we are; we have to raise taxes, probably on everyone, not just the rich; we have to invest in something that might promise amazing growth, like space travel, fast rail or water infrastructure, and we have to let natural inflation do its job. We would have to bite the bullet and accept that the US is going to be weak for about 10 years. We have to cut entitlements and pensions and put limits on imports to foster manufacturing here. We would have to force savings and punish credit card purchasing. We have to eliminate college loans and create really cheap mortgage rates, like 1.5 percent, to induce house buying and refinance. If we forced every homeowner in America to refi at 2 percent for 30 years, not only would the recession be over but we would be back in boom times. This is of course, just opinion.
That's the report for today. Bet you are sorry you asked.
Thursday, March 15, 2012
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.
- 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.
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