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DougMacG
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« Reply #150 on: March 17, 2011, 08:50:03 PM »

"So, who thinks that Japan may be the final straw?"

FWIW, I do not.  I think Japan will roar back stronger for this in spite of unthinkable tsunami fatalities.  I don't quite see how they replace the electric power lost to reactors permanently shutdown but somehow they will. Freighters from Russia of liquid natural gas perhaps.

The damage we are doing with trillion dollar deficits I think is a slow invisible cancer, getting harder and harder to cure, but not an immediate fatal blow.  Both the rise in interest rates and the rise in energy prices come from economic strength.  As economic strength falters, those increases will slow and delay we sputter until we start thinking straight and decide to fix our negligently misguided policies.  MHO.
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G M
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« Reply #151 on: March 18, 2011, 07:59:30 AM »

http://www.cnbc.com/id/42130406

US Cost of Living Hits Record, Passing Pre-Crisis High
Published: Thursday, 17 Mar 2011 | 4:09 PM ET
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By: John Melloy
Executive Producer, Fast Money

 
One would think that after the worst financial crisis since the Great Depression, Americans could at least catch a break for a while with deflationary forces keeping the cost of living relatively low. That’s not the case.

A special index created by the Labor Department to measure the actual cost of living for Americans hit a record high in February, according to data released Thursday, surpassing the old high in July 2008. The Chained Consumer Price Index, released along with the more widely-watched CPI, increased 0.5 percent to 127.4, from 126.8 in January. In July 2008, just as the housing crisis was tightening its grip, the Chained Consumer Price Index hit its previous record of 126.9.

“The Federal Reserve continues to focus on the rate of change in inflation,” said Peter Bookvar, equity strategist at Miller Tabak. “Sure, it’s moving at a slower pace, but the absolute cost of living is now back at a record high in a country that has seven million less jobs.”
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G M
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« Reply #152 on: March 18, 2011, 04:54:47 PM »

http://www.europac.net/commentaries/quake_response_puts_yen_line

Quake Response Puts Yen on the Line
March 18, 2011 - 9:53am — europac admin
By:
Peter Schiff
Friday, March 18, 2011

One of the immediate financial consequences of the catastrophic Japanese earthquake is that Japan needs to call on its huge cache of foreign exchange reserves to rebuild its shattered infrastructure. To pay for domestic projects, Japan will require yen – not dollars, euros or Swiss francs. As a result of these conversions, the yen rallied considerably after the quake struck.

But a surging yen runs counter to the macro-economic currency plans favored by most global economists. In order to maintain Japan’s position as a net-exporter of manufactured goods and net-buyer of US debt, the yen needs to stay down. So, the G-7 group of the world’s leading economies has intervened in the foreign exchange market by selling yen holdings, thereby pushing the currency down. In the short-term, their efforts appear to have been “successful,” with the yen dropping sharply today.

Theoretically, this action is being taken to preserve export earnings, but this is only a secondary effect. Primarily, in making this move, the G7 is saying that the key to rebuilding Japan’s earthquake-ravaged economy is to raise the price of everything it needs to buy.
 
After all, absolute purchasing power is far more important than nominal export earnings. When the yen gains in strength, Japan earns more dollars from its exports, which could now be used to purchase the raw materials necessary to rebuild its infrastructure. However, by weakening the yen, Japan earns fewer dollars for its exports, increasing the economic burden of reconstruction.

Conventional wisdom is that a weakening currency is a boon for economic growth and exports; however, history does not support this view.

For example, during the 20-year period from 1971 to 1991 – often referred to now as an economic miracle – the Japanese yen tripled in value against the dollar, an average appreciation rate of about 10% per year. This increasing purchasing power enabled the Japanese to enjoy steady economic growth and rising living standards. Over that time, the Nikkei gained 747%, Japan’s GDP grew at an average rate of 4.5%, and net exports increased fivefold. Government debt as a percentage of GDP fell slightly to about 60%.

Over the following 20 years, from 1991 – 2011, the Japanese economy has been dead in the water. Yen appreciation slowed considerably, with the currency rising by approximately 50% against the dollar, or about 2.5% per year. Meanwhile, the Nikkei fell 60%, GDP grew by less than 1% per annum, and net exports were stagnant. Government debt exploded to over 225% of GDP.

At the end of the first period, Japan was the world's largest creditor state and was widely forecast to dominate the global economy for the following century. Now, the country is a troubled backwater among developed economies, which is being eclipsed by its neighbors across the Pacific Rim.

The real problem for Japan is that in the aftermath of the bursting of the stock and real estate bubbles, the Japanese government refused to allow market forces to repair the damage. Instead, it based its foolish approach on restricting the rise in its currency to maintain exports to the United States.  In this cart-before-the-horse worldview, Japan assumed its economic growth was a function of its exports. In reality, exports flow from economic growth.

So, in order to engineer an export-led recovery, Japan embarked on an era of central government planning, Keynesian style pump-priming, and nearly endless quantitative easing. The result was disaster. The only bright spot was that the underlying strength of the Japanese economy kept a lid on consumer prices despite all the inflation deliberately created by the Bank of Japan. So even while good jobs have become harder to find, ordinary consumers have had the benefit of falling prices. It is ironic that Japan’s "deflation" is cited as the primary cause of its malaise. If Japan’s economy had been less efficient, its 20-year malaise would have been accompanied by increasing consumer prices, a.k.a. stagflation. This would have caused much more suffering to the Japanese people.

Still, as a result of its enormous economic policy errors, much of Japan’s efforts over the past 20 years have benefitted Americans rather than its own citizens. A tremendous share of their purchasing power was transferred across the Pacific, helping to inflate a bubble economy in the United States. Of course, as the Japanese economy struggled beneath the weight of this massive American subsidy, it gradually passed the baton to China, which for the same foolish reasons was happy to run with it.

The unfortunate reality is that the Japanese government is doing more economic damage to Japan than the earthquake and tsunami did. This new round of inflation will overwhelm the ability of the Japanese economy to offset upward pressure on consumer prices. Combine that with the lost output associated with the quake and the expense of reconstruction, and it becomes evident that inflation will soon become a major threat to Japan. As this realization forces interest rates higher, the cost to Japan of servicing its massive government debt will be crushing.

There is still time for Japan to rethink its self-destructive monetary policy, let its currency rise, and allow its economy to recover. If they do, the US will experience its own disaster as the dollar tanks.
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G M
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« Reply #153 on: March 19, 2011, 09:30:07 AM »

http://blogs.reuters.com/columns/2011/03/15/japan-reminds-strapped-officials-they-need-buffer/

Japan reminds strapped officials they need buffer
Mar 15, 2011 16:33 EDT

 

By James Pethokoukis
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

WASHINGTON — When your credit card is nearly maxed out, dealing with emergencies can be tricky. A massive rebuilding effort may stretch Japan to its financial limits. Politicians in Washington and other overspending capitals should take note of the warning.

Trying to calculate a country’s available “fiscal space” — the additional amount they can borrow before markets demand a sharply higher premium — is guesswork. The global financial crisis took the public debt of advanced economies to 75 percent of GDP in 2009 from 60 percent in late 2007. And by 2015, the International Monetary Fund reckons, the average ratio may hit 85 percent. That’s perilously close to the 90 percent level where debt seems to really hamper growth, according to economists
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Crafty_Dog
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« Reply #154 on: March 19, 2011, 11:26:14 AM »

Three Flawed Fed Exit Options
Mises Daily: Monday, March 14, 2011 by Robert P. Murphy

Whether giving public lectures or teaching at theMises Academy, I'm often asked whether Bernanke will be able to "pull this off." Specifically, can the Fed gracefully exit from the huge hole it has dug for itself?

Unfortunately my answer is no. In the present article I'll go over three possible exit options, and explain the flaws in each.

The Problem
Before assessing the chances of escape, let's first review what the problem is:


The monetary base
The monetary base (see here for a breakdown of the various monetary aggregates) has exploded since the onset of the financial crisis in late 2008. After a huge initial spurt, the base shot up twice more, in response to the first and second rounds of "quantitative easing."

To get a sense of just how unprecedented and enormous Bernanke's injections have been, look at the relatively insignificant blip back at the start of 2000. To calm the markets heading into the Y2K changeover, Greenspan preemptively flooded the system with liquidity. At the time, many Fed watchers blamed that spike and fall for exacerbating the bubble in the NASDAQ. But in comparison with Bernanke's moves, we can barely find Greenspan's Y2K fiddling on the chart.

Austrian economists know that the Fed's creation of new money can distort markets by pushing interest rates below their natural market level. This is a subtle point that most commentators ignore. Instead, the thing that has more and more people worrying at night is the potential for runaway price inflation.

Specifically, there are currently about $1.2 trillion in "excess reserves" in the banking system. Loosely speaking, the banks have this much money on deposit with the Fed, above and beyond their reserve requirements (needed to "back up" their existing customer checking account balances and the like), and they are free to lend it out to their own customers.

Because of the fractional-reserve banking system, the $1.2 trillion in excess reserves could ultimately translate into almost $11 trillion in new money created by the banks, as they pyramid new loans on top of the base money Bernanke has injected. The M1 measure of the money stock is currently $1.9 trillion, meaning that even if the Fed stopped inflating tomorrow, the banking system would have the potential to increase the money stock by a factor of six. Even if the demand for dollars remained constant in such an environment (which it wouldn't), that could mean oil prices above $600 a barrel.

So far, we haven't seen such massive price inflation, because the banks are reluctant to advance new loans. But at some point — because their balance sheets have sufficiently healed, or because creditworthy borrowers begin offering higher interest rates — the commercial banks will begin taking their excess reserves (currently parked at the Fed) and making new loans to their customers. At that point, the Fed will need to act quickly to prevent a self-perpetuating spiral into price inflation.

Publicly, Bernanke and other Fed officials are confident that they will be able to take the punch bowl away before the guests become too intoxicated. But their rosy predictions simply assume that severe stagflation is not possible. We'll go through three possible options for dealing with the above problem, and show the flaws in each.

Option #1: Pay Higher Interest Rates on Excess Reserves
The option that Bernanke himself frequently mentions is the Fed's ability to offer higher interest rates on excess reserves. Currently, if a commercial bank keeps its excess reserves parked at the Fed, the balance grows at an annual percentage rate (APR) of 0.25 percent, or what is called 25 "basis points."

Now suppose (either because of rising price inflation or because of a healthy recovery) that theprime rate — what commercial banks charge their best clients — rises from its current level (3.25 percent) to, say, 10 percent. (This isn't farfetched; the prime rate was higher than 10 percent in the late 1980s.)

Faced with earning a completely safe 0.25 percent by keeping their money parked at the Fed, versus earning a very (but not perfectly) safe 10 percent by lending to their most stable customers, many banks would begin drawing down their excess reserves, thus starting the inflationary spiral. To check this, the Fed could also bump up the yield it pays, to (say) 7.25 percent. By maintaining the spread between the two rates, the Fed could bribe the bankers to keep their money locked up at the Fed.

For one thing, it's important to note that Bernanke, Geithner, and other officials are trying to have it both ways with the public. On the one hand, they pat themselves on the back for saving the financial system and ensuring the smooth functioning of the credit markets so that businesses can continue to make their payroll and so forth. Yet on the other hand, Bernanke implicitly admits that right now banks are not making loans with the more than $1 trillion he's injected into the system, and that if they started to lend out that money, he would offer them even more to stop.

"Taxpayers would ultimately be the ones paying bankers to not give them loans."In any event, Bernanke's favored "tool" of raising the interest rate on excess reserves is the epitome of kicking the can down the road. In the beginning, the higher payments would simply reduce the Fed's net earnings, meaning that it would remit less money to the Treasury. Thus, the federal deficit would grow larger, meaning that taxpayers would ultimately be the ones paying bankers to not give them loans.

But at some point, if the process continued, the Fed would have exhausted its income from other sources. For example, on a balance of $1.2 trillion, if the Fed had to pay 7.5 percent interest, that would translate into $90 billion in annual payments to the banks. (The Fed earned about $81 billion in net income in 2010, of which it remitted $78 billion to the Treasury.)

To be sure, nothing would stop Bernanke from making such payments. He isn't constrained by income statements; Bernanke laughs at the shackles holding back lesser men. He could simply bump up the numbers in the Fed's computers in order to reflect the growing reserves balances of the commercial banks if they kept their funds with the Fed.

But this would hardly "solve" the problem of excess reserves. Rather than facing a $1.2 trillion problem, the next year the Fed would face a $1.21 trillion problem, and so on. The excess reserves would grow exponentially.

Option #2: Pull Reserves Out of the System
The most obvious solution to the problem would be to reverse the operations that got us into the mess. Specifically, the Fed could stop reinvesting the proceeds of its current asset holdings, so that its balance sheet would gradually shrink as its existing Treasury bonds and mortgage-backed securities matured.[1] If more drastic action were needed, the Fed could begin selling off its assets before maturity. When private-sector institutions wrote checks to purchase them, those reserves would disappear from the system.

Although this approach would work — and it is ultimately what I would recommend as part of the solution, in addition to pegging the dollar back to gold — it would not be painless. Many analysts talk as if the Fed's bloated balance sheet will "naturally unwind," as the economy grows out of the current slump.

But if the Austrian critique of Bernanke is correct, he has not built a solid foundation for recovery. Instead, he has merely pushed back the day of reckoning a few years, in the same way that Alan Greenspan staved off the dot-com crash only to serve up the housing crash.

What happens if producer prices continue rising, squeezing retailers so that eventually even consumer prices begin rising at, say, 8 percent annualized rates? And what if the real-estate market is still a mess, and unemployment is still 9 percent at that point? As yields rise in response to the price inflation, commercial banks won't be content to sit on cash. They will need to "put it to work" to keep up with the declining value of the dollar.

In that environment, if Bernanke started selling off hundreds of billions worth of Fed assets (consisting of Treasury debt, Freddie and Fannie debt, and mortgage-backed securities), it would cause a sharp spike in interest rates, and would devastate the real-estate and financial sectors. Just as Bernanke's original interventions obviously helped the major players in these fields, the reverse of those interventions would obviously hurt them. The enormous federal deficit would no longer seem so innocuous once interest rates on even short-term Treasuries began rising.

In short, shrinking the Fed's balance sheet — and thereby destroying the excess reserves just as magically as Bernanke's purchases originally created them — could "work," but in particular (plausible) scenarios it would plunge the United States back into depression. Bernanke and other optimists have not explained why these scenarios won't occur, besides the obviously false assertion that we can't have rising prices with high unemployment.

To add yet another twist, we should point out that if the price inflation or the financial crashes (or both) were severe enough, the Fed's assets might drop significantly before Bernanke could sell them back to the market. In that case, even if he wanted to, Bernanke couldn't suck out all of the $1.2 trillion in excess reserves, because he would be selling the assets for less than he originally paid to acquire them.

Option #3: Increase Reserve Requirements
Hard-money enthusiasts occasionally ask me, "Couldn't Bernanke just increase the reserve requirements?" For example, what if Bernanke ended the fractional-reserve system, and insisted that commercial banks have $100 set aside in reserves (either as cash in their vaults or as electronic deposits with the Fed) for every $100 in customer deposits?

Like the previous solution, this one too would "work" but it would devastate the financial sector even more. From the commercial banks' viewpoint, such a policy move would effectively steal $1.2 trillion in cash from them.

To see why, consider an analogy: Suppose Bill Smith has a salary of $100,00 per year. Now Smith is a very cautious man, who has carefully saved up $100,000 in his checking account. Smith is very paranoid and doesn't even trust money-market mutual funds; no, he wants his money "in the bank," in an FDIC-insured account.

But now President Obama comes along, and says that Americans ought to be saving more. To encourage this, Obama says that every adult must carry a checking account balance equal to his or her annual income. If anyone lets his checking account balance fall below that amount, he gets fined $10,000 per day.

In such a (ridiculous) scenario, it's obvious that our poor Bill Smith would be devastated. His stockpile of $100,000 — which the day before was a wonderful emergency fund that could weather all sorts of storms — would now be useless, except as a way to fend off huge fines from the government. It would no longer be savings at all. Smith would have to start from scratch, and begin building up savings of $200,000 to get back to his previous level of security.

A similar analysis holds for the commercial banks. Even though many commentators talk as if the $1.2 trillion in excess reserves aren't "real money," because they aren't "in the economy," this isn't accurate. Just ask the bankers if they consider those funds to be real money.


If the Fed were to raise reserve requirements, the money that commercial bankers currently view as a hoard of cash would lose its economic significance. It would be equivalent to the Fed simply seizing the funds. This is why raising the reserve requirements would devastate the banks even more than selling off assets: At least if the Fed destroys reserves by selling assets, the commercial banks voluntarily make the trade, and end up with something valuable.

Conclusion
No one knows the future; I am not certain how things will play out. What alarms me more than the basic facts, however, is that the people telling us we have nothing to worry about typically don't even look two steps ahead in their analysis. Bernanke has effectively gone "all in" with his successive rounds of quantitative easing, and I get the queasy feeling that he's bluffing.
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G M
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« Reply #155 on: March 22, 2011, 12:11:43 PM »

http://www.cnbc.com/id/42209447

US Approaching Insolvency, Fix To Be 'Painful': Fisher
Published: Tuesday, 22 Mar 2011 | 10:10 AM ET
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By: Reuters

   
The United States is on a fiscal path towards insolvency and policymakers are at a "tipping point," a Federal Reserve official said on Tuesday.

"If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when," Dallas Federal Reserve Bank President Richard Fisher said in a question and answer session after delivering a speech at the University of Frankfurt.

"The short-term negotiations are very important, I look at this as a tipping point."

But he added he was confident in the Americans' ability to take the right decisions and said the country would avoid insolvency.
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G M
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« Reply #156 on: March 26, 2011, 07:01:31 PM »

Not so much, anymore.

http://www.washingtonpost.com/business/economy/us-dollar-usually-worlds-safe-haven-declining-despite-plenty-of-global-turmoil/2011/03/24/ABlrFiRB_story.html

U.S. dollar, usually world’s safe haven, declining despite plenty of global turmoil
  Neil Irwin, Thursday, March 24, 8:53 PM
When the world is in turmoil, investors have usually had one automatic response: Put money into dollars, viewed as the global safe harbor.

But that’s not happening in this tumultuous year. Even with the Middle East in conflict, Japan in disarray after a series of disasters and Europe facing a debt crisis, the dollar has been gradually falling in value against other major currencies. Having fallen relative to the euro, pound and yen in recent months, the dollar is down 7 percent against a basket of six major currencies since Jan. 7 and 14 percent since June.

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G M
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« Reply #157 on: March 26, 2011, 07:21:20 PM »

Not so much, anymore.

http://www.bloomberg.com/news/2011-03-25/buffett-says-avoid-long-term-bonds-tied-to-eroding-dollar-value.html

Warren Buffett, the billionaire who urged Congress in 2009 to guard against inflation, said investors should avoid long-term fixed-income bets in U.S. dollars because the currency’s purchasing power will decline.

“I would recommend against buying long-term fixed-dollar investments,” Buffett, chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A), said today in New Delhi. “If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not.”

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Crafty_Dog
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« Reply #158 on: March 27, 2011, 08:11:55 AM »



12 Warning Signs of U.S. Hyperinflation
 
One of the most frequently asked questions we receive at the National Inflation Association (NIA) is what warning signs will there be when hyperinflation is imminent. In our opinion, the majority of the warning signs that hyperinflation is imminent are already here today, but most Americans are failing to properly recognize them. NIA believes that there is a serious risk of hyperinflation breaking out as soon as the second half of this calendar year and that hyperinflation is almost guaranteed to occur by the end of this decade.
 
In our estimation, the most likely time frame for a full-fledged outbreak of hyperinflation is between the years 2013 and 2015. Americans who wait until 2013 to prepare, will most likely see the majority of their purchasing power wiped out. It is essential that all Americans begin preparing for hyperinflation immediately.
 
Here are NIA's top 12 warning signs that hyperinflation is about to occur:
 
1) The Federal Reserve is Buying 70% of U.S. Treasuries. The Federal Reserve has been buying 70% of all new U.S. treasury debt. Up until this year, the U.S. has been successful at exporting most of its inflation to the rest of the world, which is hoarding huge amounts of U.S. dollar reserves due to the U.S. dollar's status as the world's reserve currency. In recent months, foreign central bank purchases of U.S. treasuries have declined from 50% down to 30%, and Federal Reserve purchases have increased from 10% up to 70%. This means U.S. government deficit spending is now directly leading to U.S. inflation that will destroy the standard of living for all Americans.
 
2) The Private Sector Has Stopped Purchasing U.S. Treasuries. The U.S. private sector was previously a buyer of 30% of U.S. government bonds sold. Today, the U.S. private sector has stopped buying U.S. treasuries and is dumping government debt. The Pimco Total Return Fund was recently the single largest private sector owner of U.S. government bonds, but has just reduced its U.S. treasury holdings down to zero. Although during the financial panic of 2008, investors purchased government bonds as a safe haven, during all future panics we believe precious metals will be the new safe haven.
 
3) China Moving Away from U.S. Dollar as Reserve Currency. The U.S. dollar became the world's reserve currency because it was backed by gold and the U.S. had the world's largest manufacturing base. Today, the U.S. dollar is no longer backed by gold and China has the world's largest manufacturing base. There is no reason for the world to continue to transact products and commodities in U.S. dollars, when most of everything the world consumes is now produced in China. China has been taking steps to position the yuan to be the world's new reserve currency.
 
The People's Bank of China stated earlier this month, in a story that went largely unreported by the mainstream media, that it would respond to overseas demand for the yuan to be used as a reserve currency and allow the yuan to flow back into China more easily. China hopes to allow all exporters and importers to settle their cross border transactions in yuan by the end of 2011, as part of their plan to increase the yuan's international role. NIA believes if China really wants to become the world's next superpower and see to it that the U.S. simultaneously becomes the world's next Zimbabwe, all China needs to do is use their $1.15 trillion in U.S. dollar reserves to accumulate gold and use that gold to back the yuan.
 
4) Japan to Begin Dumping U.S. Treasuries. Japan is the second largest holder of U.S. treasury securities with $885.9 billion in U.S. dollar reserves. Although China has reduced their U.S. treasury holdings for three straight months, Japan has increased their U.S. treasury holdings seven months in a row. Japan is the country that has been the most consistent at buying our debt for the past year, but that is about the change. Japan is likely going to have to spend $300 billion over the next year to rebuild parts of their country that were destroyed by the recent earthquake, tsunami, and nuclear disaster, and NIA believes their U.S. dollar reserves will be the most likely source of this funding. This will come at the worst possible time for the U.S., which needs Japan to increase their purchases of U.S. treasuries in order to fund our record budget deficits.
 
5) The Fed Funds Rate Remains Near Zero. The Federal Reserve has held the Fed Funds Rate at 0.00-0.25% since December 16th, 2008, a period of over 27 months. This is unprecedented and NIA believes the world is now flooded with excess liquidity of U.S. dollars.
 
When the nuclear reactors in Japan began overheating two weeks ago after their cooling systems failed due to a lack of electricity, TEPCO was forced to open relief valves to release radioactive steam into the air in order to avoid an explosion. The U.S. stock market is currently acting as a relief valve for all of the excess liquidity of U.S. dollars. The U.S. economy for all intents and purposes should currently be in a massive and extremely steep recession, but because of the Fed's money printing, stock prices are rising because people don't know what else to do with their dollars.
 
NIA believes gold, and especially silver, are much better hedges against inflation than U.S. equities, which is why for the past couple of years we have been predicting large declines in both the Dow/Gold and Gold/Silver ratios. These two ratios have been in free fall exactly like NIA projected.
 
The Dow/Gold ratio is the single most important chart all investors need to closely follow, but way too few actually do. The Dow Jones Industrial Average (DJIA) itself is meaningless because it averages together the dollar based movements of 30 U.S. stocks. With just the DJIA, it is impossible to determine whether stocks are rising due to improving fundamentals and real growing investor demand, or if prices are rising simply because the money supply is expanding.
 
The Dow/Gold ratio illustrates the cyclical nature of the battle between paper assets like stocks and real hard assets like gold. The Dow/Gold ratio trends upward when an economy sees real economic growth and begins to trend downward when the growth phase ends and everybody becomes concerned about preserving wealth. With interest rates at 0%, the U.S. economy is on life support and wealth preservation is the focus of most investors. NIA believes the Dow/Gold ratio will decline to 1 before the hyperinflationary crisis is over and until the Dow/Gold ratio does decline to 1, investors should keep buying precious metals.
 
6) Year-Over-Year CPI Growth Has Increased 92% in Three Months. In November of 2010, the Bureau of Labor and Statistics (BLS)'s consumer price index (CPI) grew by 1.1% over November of 2009. In February of 2011, the BLS's CPI grew by 2.11% over February of 2010, above the Fed's informal inflation target of 1.5% to 2%. An increase in year-over-year CPI growth from 1.1% in November of last year to 2.11% in February of this year means that the CPI's growth rate increased by approximately 92% over a period of just three months. Imagine if the year-over-year CPI growth rate continues to increase by 92% every three months. In 9 to 12 months from now we could be looking at a price inflation rate of over 15%. Even if the BLS manages to artificially hold the CPI down around 5% or 6%, NIA believes the real rate of price inflation will still rise into the double-digits within the next year.
 
7) Mainstream Media Denying Fed's Target Passed. You would think that year-over-year CPI growth rising from 1.1% to 2.11% over a period of three months for an increase of 92% would generate a lot of media attention, especially considering that it has now surpassed the Fed's informal inflation target of 1.5% to 2%. Instead of acknowledging that inflation is beginning to spiral out of control and encouraging Americans to prepare for hyperinflation like NIA has been doing for years, the media decided to conveniently change the way it defines the Fed's informal target.
 
The media is now claiming that the Fed's informal inflation target of 1.5% to 2% is based off of year-over-year changes in the BLS's core-CPI figures. Core-CPI, as most of you already know, is a meaningless number that excludes food and energy prices. Its sole purpose is to be used to mislead the public in situations like this. We guarantee that if core-CPI had just surpassed 2% and the normal CPI was still below 2%, the media would be focusing on the normal CPI number, claiming that it remains below the Fed's target and therefore inflation is low and not a problem.
 
The fact of the matter is, food and energy are the two most important things Americans need to live and survive. If the BLS was going to exclude something from the CPI, you would think they would exclude goods that Americans don't consume on a daily basis. The BLS claims food and energy prices are excluded because they are most volatile. However, by excluding food and energy, core-CPI numbers are primarily driven by rents. Considering that we just came out of the largest Real Estate bubble in world history, there is a glut of homes available to rent on the market. NIA has been saying for years that being a landlord will be the worst business to be in during hyperinflation, because it will be impossible for landlords to increase rents at the same rate as overall price inflation. Food and energy prices will always increase at a much faster rate than rents.
 
Cool Record U.S. Budget Deficit in February of $222.5 Billion. The U.S. government just reported a record budget deficit for the month of February of $222.5 billion. February's budget deficit was more than the entire fiscal year of 2007. In fact, February's deficit on an annualized basis was $2.67 trillion. NIA believes this is just a preview of future annual budget deficits, and we will see annual budget deficits surpass $2.67 trillion within the next several years.
 
9) High Budget Deficit as Percentage of Expenditures. The projected U.S. budget deficit for fiscal year 2011 of $1.645 trillion is 43% of total projected government expenditures in 2011 of $3.819 trillion. That is almost exactly the same level of Brazil's budget deficit as a percentage of expenditures right before they experienced hyperinflation in 1993 and it is higher than Bolivia's budget deficit as a percentage of expenditures right before they experienced hyperinflation in 1985. The only way a country can survive with such a large deficit as a percentage of expenditures and not have hyperinflation, is if foreigners are lending enough money to pay for the bulk of their deficit spending. Hyperinflation broke out in Brazil and Bolivia when foreigners stopped lending and central banks began monetizing the bulk of their deficit spending, and that is exactly what is taking place today in the U.S.
 
10) Obama Lies About Foreign Policy. President Obama campaigned as an anti-war President who would get our troops out of Iraq. NIA believes that many Libertarian voters actually voted for Obama in 2008 over John McCain because they felt Obama was more likely to end our wars that are adding greatly to our budget deficits and making the U.S. a lot less safe as a result. Obama may have reduced troop levels in Iraq, but he increased troops levels in Afghanistan, and is now sending troops into Libya for no reason.
 
The U.S. is now beginning to occupy Libya, when Libya didn't do anything to the U.S. and they are no threat to the U.S. Obama has increased our overall overseas troop levels since becoming President and the U.S. is now spending $1 trillion annually on military expenses, which includes the costs to maintain over 700 military bases in 135 countries around the world. There is no way that we can continue on with our overseas military presence without seeing hyperinflation.
 
11) Obama Changes Definition of Balanced Budget. In the White House's budget projections for the next 10 years, they don't project that the U.S. will ever come close to achieving a real balanced budget. In fact, after projecting declining budget deficits up until the year 2015 (NIA believes we are unlikely to see any major dip in our budget deficits due to rising interest payments on our national debt), the White House projects our budget deficits to begin increasing again up until the year 2021. Obama recently signed an executive order to create the "National Commission on Fiscal Responsibility and Reform", with a mission to "propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015". Obama is redefining a balanced budget to exclude interest payments on our national debt, because he knows interest payments are about to explode and it will be impossible to truly balance the budget.
 
12) U.S. Faces Largest Ever Interest Payment Increases. With U.S. inflation beginning to spiral out of control, NIA believes it is 100% guaranteed that we will soon see a large spike in long-term bond yields. Not only that, but within the next couple of years, NIA believes the Federal Reserve will be forced to raise the Fed Funds Rate in a last-ditch effort to prevent hyperinflation. When both short and long-term interest rates start to rise, so will the interest payments on our national debt. With the public portion of our national debt now exceeding $10 trillion, we could see interest payments on our debt reach $500 billion within the next year or two, and over $1 trillion somewhere around mid-decade. When interest payments reach $1 trillion, they will likely be around 30% to 40% of government tax receipts, up from interest payments being only 9% of tax receipts today. No country has ever seen interest payments on their debt reach 40% of tax receipts without hyperinflation occurring in the years to come.

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« Reply #159 on: March 27, 2011, 12:06:14 PM »

"National Inflation Association (NIA)..."  - I see they now have over 300 million members. (attempt at gallows humor)

"The Federal Reserve is Buying 70% of U.S. Treasuries."  - That says it all.  No one is buying our debt.  It isn't future inflation or potential inflation, it is inflation by definition.

"...because of the Fed's money printing, stock prices are rising because people don't know what else to do with their dollars"  - Translated, if and when easy money ends, stock prices will collapse.

"The Dow Jones Industrial Average (DJIA) itself is meaningless because it averages together the dollar based movements of 30 U.S. stocks."  - Maybe they read the forum, I described it as more and more dollars chasing fewer and fewer companies'.
----
"NIA has been saying for years that being a landlord will be the worst business to be in during hyperinflation, because it will be impossible for landlords to increase rents at the same rate as overall price inflation. Food and energy prices will always increase at a much faster rate than rents."

  - How does one quit that job?  sad  Actually the rent increases mostly need to pay for property taxes which (for me) are more than food, shelter, clothing and energy costs combined.  These years of no home building have actually been good for landlording.  Foreclosed homes have a huge delay back to market, many never make it, while the foreclosed person needs housing immediately.  The rental business is highly regulated, code compliance, rental licenses, asbestos, lead paint, mold issues, city orders, tight money for repairs/improvements, licensed contractor requirements, changing laws, etc. Neither the foreclosed owner nor the bank is up on the roof or checking the foundation during the last year before possession reverts worrying about water damage for example.  It was actually the boom years while everyone was buying and building that was worst time to landlords, the best renters (and a lot of mediocre ones) left the rental pool.   What housing needs simply is a better economy for income and employment, which necessarily includes a smaller government burden, rightsized regulations, and a stable dollar.

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G M
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« Reply #160 on: March 27, 2011, 12:08:58 PM »

"What housing needs simply is a better economy for income and employment, which necessarily includes a smaller government burden, rightsized regulations, and a stable dollar."

Crazy talk!
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Body-by-Guinness
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« Reply #161 on: March 29, 2011, 12:03:53 PM »

Running for the Exits
Hedge funds are dumping Treasury bonds. Do they know something?

The wisest and most successful bond investor of all time, Bill Gross, has dumped his bond fund’s $150 billion investment in U.S. bonds. One should not ignore the importance of this event. The largest bond fund in America no longer believes that Treasury bonds are a good investment. Moreover, Gross is not alone. Blackrock, the world’s largest money manager, is now underweighting Treasuries overall and reducing the duration of the bonds it still holds. That means they are dumping their long-term bonds, which are the most sensitive to interest-rate changes, in favor of Treasury instruments that mature in a year or less. Other bond funds, such as the $20 billion Loomis Sayles funds, are also forgoing Treasuries in favor of high-yield corporate bonds. Virtually everywhere you look, from great investors such as Warren Buffett to insurance companies such as Allstate, everyone is dumping their long-term U.S. debt and either buying debt that matures in less than a year or moving their money elsewhere.

So who is still buying U.S. debt? According to Bill Gross, the “old reliables” — China, Japan, and OPEC — are still in the market for 30 percent of all new debt. The rest, however, is being purchased by the Federal Reserve. There is no one in else in the market. For the first time ever, Americans are refusing to purchase their own country’s debt.

Gross estimates that the “old reliables” are still good for $500 billion a year in purchases, and will be for some time in the future. This is pretty much the amount they’ve had to buy in the past to rebalance capital flows distorted by the U.S. trade deficit. Gross, however, may be wrong this time. Japan, needing to finance its reconstruction, is much likelier to be a net seller of U.S. debt, while China’s economy is slowing and actually ran a trade deficit in the last quarter. That leaves only one buyer of consequence — the Federal Reserve.

Researchers at Gross’s firm, PIMCO, estimate that in the last quarter, the Fed purchased 70 percent of all new Treasury debt. This is a disaster in the making. By printing new money to buy debt, the Fed is both holding interest rates artificially low and flooding the world with dollars. Fed purchases have lowered rates to the point where there was no room for further decreases. With no more upside potential to holding debt, investors are fleeing on the assumption that the Fed will soon exit the market, causing rates to rise dramatically. Such a rate rise lowers the value of all current U.S. debt: Who will pay $1,000 for a bond paying 3 percent when she can get one paying 5 percent? Anyone who wants to sell a $1,000 bond they already own is therefore forced to lower the price if they wish to attract buyers. No one holding any of the almost $10 trillion in U.S. public debt is getting much sleep these days.



When the Fed’s $600 billion QE2 buying spree ends, there will not be enough buyers left to purchase the $1.4 trillion in debt the administration has built into this year’s budget, at least not at current interest rates. Gross believes interest rates have to rise approximately 1.5 percent (150 basis points) to attract sufficient buyers. This may be optimistic.

The Fed is not only looking to stop buying new debt, it also wants to get rid of the nearly $1.3 trillion currently on its balance sheet. Absorbing $1.4 trillion in new debt, rolling over maturing debt, and simultaneously purchasing debt the Fed bought during its quantitative-easing forays is a lot to ask of the market.

Moreover, there is a real risk that bondholders who see the value of their assets fall will stampede for the doors. There are already signs that the smart money is looking for just such an event. Short sellers — those betting on a bond sell-off — pumped over three-quarters of a billion dollars into short positions in just the last quarter. This compares with a negative flow of short funds in the same period last year. If the short sellers are right, and there is a stampede, all bets are off. The bond-market bubble that the Fed’s purchases created will explode, likely setting off a renewed financial crisis.

Come June, the Fed will be in a bind of its own making. If it stops pumping money into the system, interest rates will increase, and not just on Treasury bonds. Mortgage rates will rise and business credit will become more costly. The recovery could be strangled in its infancy. If it keeps on buying bonds, however, it risks never being able to wean the markets off the equivalent of monetary crack. Worse, the flood of dollars will continue to drive down the value of the dollar, raise commodity prices, and propel global inflation.

There are already signs that inflation, while still subdued in the United States, is looking to break out. It has begun wrecking havoc through many areas of the globe, for example providing the catalyst for much of the upheaval in the Middle East. And when it strikes here, the Fed will be out of options. It will have to turn off the money pumps, raise interest rates, and batten down the financial hatches. The resulting recession will be long and nasty.

It is time to face facts. Spending is so out of control that Treasuries are no longer a safe haven for investors. The markets are saturated with U.S. debt and increasingly unwilling to absorb more. There is only one way out of this mess — cut spending, fast and deep.

Given that the Congressional Budget Office last week stated that the administration’s budget would raise the debt by $2.3 trillion more than the White House Budget Office claims, these cuts are going to hurt. They will probably hurt a lot. That is the cost of fending off a true catastrophe.

— Jim Lacey is the professor of strategic studies at the Marine Corps War College and the author of the forthcoming book The First Clash. The views in this article are the author’s own and do not in any way represent the views or positions of the Department of Defense or any of its members.
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G M
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« Reply #162 on: March 29, 2011, 12:11:35 PM »

I can say I'm very doubtful that the pols/public is willing to seriously address this until the system actually collapses.
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DougMacG
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« Reply #163 on: March 29, 2011, 02:37:16 PM »

"...in the last quarter, the Fed purchased 70 percent of all new Treasury debt. This is a disaster in the making. "...
"When the Fed’s $600 billion QE2 buying spree ends, there will not be enough buyers left..."

Here we go again.  Temporary programs.  Cash for Clunkers, foreclosure moratoriums, Stimulus 1, Stimulus 2, QE1, QE2... What do we think will happen at the end of these programs? The band aid fell off.  Nothing healed.  The natural consequence should be that when there is no one left to buy the debt, any rational economic player would STOP BORROWING.

You would think we were arguing over $10,000, or a million or a billion by the way most of the people and most of the elected officials seem oblivious.  We are talking about over a trillion a year going into the tens of trillions in accumulation.  Complete insanity.  Even if it was lowering unemployment, it is complete insanity, but it has done no measurable good while setting up inevitable, catastrophic harm.

I actually think instant inflation (QE1, QE2, print money) is better than the lingering kind with more and more borrowing (like comparing the guillotine to a hanging). If we are no longer borrowing 70% of our excess spending, we at least don't accrue real interest on that portion.  If we are just cheapening our dollar, we might as well know it as soon as possible. 
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« Reply #164 on: March 31, 2011, 11:17:28 AM »

Not well, methinks.

http://www.reuters.com/article/2011/03/31/ecb-fed-rates-idUSLDE72S1AE20110331

* ECB hiking before Fed would be new in a tightening cycle

* Shows Asia's increased influence on euro zone

* Fed likely to narrow rate gap with ECB later


By Paul Carrel

FRANKFURT, March 31 (Reuters) - After following the Federal Reserve's lead for over a decade, the European Central Bank is poised to launch a series of interest rate hikes before the U.S. central bank for the first time in the ECB's history.

The change from the traditional pattern reflects the ECB's greater preoccupation with inflation pressures, as well as its higher level of discomfort with the emergency bond-buying programmes run by central banks.

But the "decoupling" of ECB and Fed policies is also the result of an historic shift in the global economy: the increased influence that Asia, rather than the United States, is having on the euro zone's economy.

"I think we are in a new world where global interest rate cycles are not initiated by the Fed," said Jens Sondergaard, senior European economist at Nomura.

"There has been a lot of import price inflation pushing up euro area inflation...and a lot of this is related to above-trend growth in Asia."

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« Reply #165 on: April 01, 2011, 10:21:16 AM »

http://www.cnbc.com/id/42363054

Inflation Getting Stronger than a 'Whiff'
Published: Thursday, 31 Mar 2011 | 3:48 PM ET Text Size By: Patti Domm
CNBC Executive News Editor


There's more than just a whiff of inflation in the air, especially if you're standing outside a Hershey chocolate factory or shopping in a Walmart.

Hershey [HSY  54.305    -0.045  (-0.08%)   ] Wednesday announced a nearly 10 percent price increase across its line of candy products to cover rising raw material costs, fuel and transportation.

 
CNBC.com
--------------------------------------------------------------------------------
 

Those rising costs are impacting many other manufacturers that rely on everything from diesel fuel to corn to cotton to copper and of course, cocoa.

It will also be true if you are shopping in Walmart, or anywhere else. Wal-Mart Stores [WMT  52.23    0.18  (+0.35%)   ] CEO Bill Simon told USA Today this week that inflation "is going to be serious" and price rises are already showing up in dairy and cotton products and more are coming in transportation-related products.

Moody's Economy.com economist Mark Zandi said the idea that inflation is picking up may be actually more of a reality than economists are currently forecasting. He said he attended a meeting with consumer products companies officials this week, and he heard plenty.

"They were all on the verge of jacking up their prices," he said. Price increases are not always seen as bad though. When companies have pricing power, it often means there is some traction in the economy, but it's a fine balance.

The threat of inflation is even more worrisome now that oil has crossed above $105 per barrel and looks set to stay high due to unrest in the Middle East. Some commodities have also seen shortages for other reasons and that has combined to drive prices. For instance, cocoa, trading lower Thursday, has been driven higher by civil war in Ivory Coast.

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G M
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« Reply #166 on: April 01, 2011, 10:24:38 AM »

So what happens to our nat'l debt when the rates go up?
http://www.cnbc.com/id/42363070

Fed Is Likely to Raise Rates By End of the Year: Lacker
Published: Friday, 1 Apr 2011 | 10:46 AM ET Text Size By: CNBC.com and Reuters

Richmond Federal Reserve President Jeffrey Lacker told CNBC Friday that he "wouldn't be surprised" if the central bank raised interest rates before the end of the year.

 
Source: Richmondfed.org
Jeffrey Lacker
--------------------------------------------------------------------------------
 

In an interview at a banking meeting hosted by the Richmond Fed, Lacker also said ending the Fed's bond-buying stimulus program also "deserves consideration."

He gave no timetable for the rate hikes and other actions. "The exact sequencing of that is something we’re hashing out and trying to think through," he said.

Raising interest rates and ending asset sales is warranted this year because of concerns about inflation and a need to "normalize interest rates" as the economy improves.

He said his greater concern is rising inflation and controlling it in the next nine months "will be critical for us."

Lacker's comments echoed those by another inflation hawk, Minneapolis Fed President Narayana Kocherlakota, told the Wall Street Journal Thursday that the Fed could raise benchmark borrowing costs, which are now close to zero, by three-quarters of a percentage point by the end of the year,

Kocherlakota, a voter on the Fed's policy-setting panel this year, also said the Fed's latest stimulus program should end as scheduled in June.

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Crafty_Dog
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« Reply #167 on: April 01, 2011, 10:30:34 AM »

Maybe I am being a Chicken Little here, but I can picture a lot of hot capital deciding to move elsewhere and rates rising more and faster than these clever people think will be the case.
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G M
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« Reply #168 on: April 01, 2011, 10:46:57 AM »

Call me king of the chicken littles, but I think this is where the wheels really start to come off.
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« Reply #169 on: April 01, 2011, 10:53:17 AM »

OTOH, , ,

Data Watch

--------------------------------------------------------------------------------
Non-farm payrolls increased 216,000 in March To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 4/1/2011


Non-farm payrolls increased 216,000 in March.  Revisions to January/February added 7,000, bringing the net gain to 223,000.  The consensus expected a gain of 190,000.

Private sector payrolls rose 230,000 in March. Revisions to January/February added 44,000, bringing the net gain to 274,000.  March gains were led by health care (+37,000), bars/restaurants/hotels (+35,000), temps (+29,000), accounting/bookkeeping (+20.000), retail (+18,000), and manufacturing (+17,000).  The largest decline was for home building  (-7,000).
 
The unemployment rate fell to 8.8% in March from 8.9% in February.
 
Average weekly earnings – cash earnings, excluding benefits – were unchanged in March but up 2.3% versus a year ago. 
 
Implications:  The US labor market is clicking on almost all cylinders and we expect persistently solid payroll growth, month after month, for the foreseeable future. Including upward revisions to prior months, non-farm payrolls increased 223,000 while private sector payrolls jumped 274,000. This strength was confirmed by figures on civilian employment – an alternative measure of jobs that is better at picking up the self-employed and small start-up businesses – which increased 291,000. The increase in jobs pushed down the unemployment rate to 8.8%, the lowest in two years. The “soft” part of the report was that average hourly earnings were unchanged in March. However, these earnings are up 1.7% versus a year ago while total hours worked are up 2.1%. As a result, total cash earnings by workers are up 3.8% in the past year. So far, this is more than enough for workers, as a whole, to keep up with inflation. More timely news on the labor market shows further progress. New claims for unemployment insurance declined 6,000 last week to 388,000. Continuing claims for regular state benefits dropped 51,000 to 3.71 million. News like this is behind the recent increase in “hawkish” comments from Federal Reserve officials. The breadth of the comments suggests some degree of coordination. We believe the Fed wants to make it crystal clear to the financial markets that a third round of quantitative easing is highly unlikely.
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G M
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« Reply #170 on: April 01, 2011, 10:59:37 AM »

 rolleyes

Hey! There's a new flavor of Kool-aid! Wes-berry Punch!

One drink and even the darkest scenario is made bright by a slight statistical deviation.



I better order a vat from Costco while I can still afford it.
« Last Edit: April 01, 2011, 11:08:13 AM by G M » Logged
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« Reply #171 on: April 01, 2011, 11:10:36 AM »

http://www.gallup.com/poll/127091/underemployment-rises-march.aspx

Underemployment Rises to 20.3% in March
Unemployment saw a slight but insignificant decline

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G M
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« Reply #172 on: April 01, 2011, 12:10:57 PM »

http://www.gallup.com/poll/125639/Gallup-Daily-Workforce.aspx

Flatter than Kansas.
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« Reply #173 on: April 01, 2011, 05:16:24 PM »

http://finance.fortune.cnn.com/2011/03/31/gross-calls-u-s-budget-a-greek-tragedy/?section=magazines_fortune
Gross calls U.S. budget a Greek tragedy

Posted by Colin Barr

March 31, 2011 5:40 am



Bond manager Bill Gross says he is "confident" the United States will effectively default on its debt unless Congress takes an ax to retirement and healthcare spending.
 
Gross runs Pimco, the $1.2 trillion investment manager that has spent recent months selling Treasury bonds, citing their low yields and poor prospects. He explains in his monthly investment outlook posted Wednesday evening that U.S. government bonds "have little value" in a world of bloated budgets.

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« Reply #174 on: April 02, 2011, 04:49:34 PM »


http://www.nationalreview.com/campaign-spot/263656/our-workforce-lost-233-million-people-one-year

Our Workforce Lost 2.33 Million People in One Year?

April 1, 2011 12:38 P.M.

By Jim Geraghty   

 

Tags: Barack Obama


 My regular correspondent Number Cruncher takes a look at the latest jobs report from the Bureau of Labor Statistics, and notices:
 

The percentage of the overall population that is employed in March 2010 was 58.6 percent. One year later, the total percentage of overall population  employed is… 58.5 percent.  Conclusion: In a growing population we have produced fewer jobs than the number that the population grew. (For the record, the number of Civilian non-institutionalized population was 237.2 million in March 2010, and is 239.00 million in March 2011.)

 The number of people who were “not in the labor force” In March 2010 was 83,264,000 (seasonally adjusted). In March 2011, it was 85,594,000 (seasonally adjusted). If you want to know how unemployment dropped a point, look no further than this statistic.
 
If you remove 2.33 million people from the labor force within one year, that will indeed help lower the unemployment rate. It is, however, not the same as helping the unemployed find jobs.
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« Reply #175 on: April 03, 2011, 05:00:03 PM »

http://www.youtube.com/watch?feature=player_embedded&v=oaoePVVhiDc

« Last Edit: April 03, 2011, 05:01:35 PM by G M » Logged
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« Reply #176 on: April 04, 2011, 07:52:59 AM »

http://pajamasmedia.com/eddriscoll/2011/04/03/scary-ass-charts-of-the-day/

Change! I'd like to see the Wesbury spin on this.
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« Reply #177 on: April 06, 2011, 01:54:50 PM »



By SEAN FIELER AND JEFFREY BELL
'I will maintain to my deathbed that we made every effort to save Lehman, but we were just unable to do so because of a lack of legal authority." So said Federal Reserve Chairman Ben Bernanke in 2009. The statement was striking—not because it was false, but because the Fed lacked explicit legal authority to do so much of what it did during the financial crisis. Drawing the line at Lehman seemed arbitrary, and it proved that the Fed has become an unaccountable power within American government.

Mr. Bernanke's insistence that the Fed is restrained by some obscure statute is central to his argument that the Fed is a body subject to the check of external forces. But it's not. The principal check on its power is the self-restraint of its chairman, a point proven by the Lehman example: Had Mr. Bernanke saved Lehman, who would have enforced the statute that he had violated? No one. That's because the Fed, as currently configured, has no opposing force to rein it in.

In the beginning, it was not so. When the Fed was created in 1913, the gold standard limited its power as did the balance between the 12 reserve banks across the country and the Federal Reserve Board in Washington. Lawmakers thought that the reserve banks would represent regional economic interests in tension with the national political agenda of the board in Washington. Moreover, the Federal Reserve Act imposed a hard constraint on the Fed's balance sheet: 40% of the Fed's notes had to be backed by gold. Finally, the Fed's charter was temporary, lasting only 20 years before requiring congressional reauthorization.

These constraining forces began unraveling almost right away. During World War I, the Wilson administration suspended and then restricted the dollar's convertibility into gold. In 1927, the Fed's charter was extended indefinitely. In 1932, the Glass-Steagall Act effectively unmoored the Fed's balance sheet from gold by allowing government bonds to serve as collateral against the issuance of Federal Reserve notes. And with the passage of the Banking Act of 1935, the Fed's newly expanded powers were concentrated in the Federal Reserve Board, at the expense of the reserve banks. Thus by the mid-1930s, the only remaining check on the Fed's power was statutory.
Statutory supervision of government bureaucracies is usually workable because Congress maintains the power of the purse. But the Fed, which can print money, has no budget constraint. Its profit and loss statement doesn't matter because, unlike every other legal entity, its liabilities are irredeemable. Not having a real budget means that the Fed doesn't have to compete with anyone for scarce resources.

Accordingly, Congress, banks and businesses—institutions that would typically be skeptical of a government bureaucracy's uncontrolled expansion—are instead interested in capturing the Fed for their own purposes. From the Long-Term Capital Management bailout in 1998 to the cleanup of 2008, Congress has come to rely on the Fed's ability to act—and thereby excuse Congress from having to vote on unpopular bailouts. What's more, the government remains dependent on the Fed to help finance its debt going forward. Similarly, banks and big corporations are potential beneficiaries of low-cost leverage and (in the wake of popped bubbles) expedient bailouts.

Thanks to the tea party, there are increased numbers of reform-minded leaders in Congress willing to take on big issues such as the Fed. But even those lawmakers who recognize the Fed's threat to liberty are advocating narrow fixes, such as imposing the "single mandate" of price stability (and removing the Fed's statutory responsibility for full employment). That alone wouldn't impose any meaningful check or balance on the Fed's power.

If the history of the Fed proves anything, it is that no mere rule will take the fiat out of fiat money. And there is no reason to believe that a single mandate would have stopped "quantitative easing." More importantly, what would happen to the single mandate of price stability if and when the Fed violated it? At worst, Congress would hold hearings and be very, very upset. Or it wouldn't do even that, because the most likely reason the Fed would allow inflation to get out of control is to finance Congress's ever-growing budget deficits.

Members of Congress seeking to restrict the Fed's power need to consider what oppositional force is truly capable of hemming it in. One answer is a revived gold standard, which would once again obligate the Fed to redeem dollars for gold at a fixed rate.

Equally effective would be to leave the Fed and the dollar system untouched, but to allow gold a level playing field on which to compete with the dollar. Utah has already taken the first step in this direction by passing a law formally recognizing gold as legal tender. But for the playing field to be truly leveled, all taxes on gold transactions need to be removed and individuals and businesses need to be permitted to report their financial accounts in gold.

While it might not seem obvious to pit the dollar against gold, which has not been used as final money in over 100 years, it would provide a significant restraint on the Fed. Simply allowing gold to be used as currency again would concentrate the minds of the Federal Reserve Board on keeping inflation under control. Competition, after all, would mean that if the Fed doesn't preserve price stability, it will lose its monopoly franchise—not just get a tough talking-to from Congress.

Mr. Fieler and Mr. Bell are chairman and policy director, respectively, of the American Principles Project.
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« Reply #178 on: April 07, 2011, 11:50:25 AM »

http://www.cnbc.com/id/42409859

Almost like the dollar is devalued or something.
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« Reply #179 on: April 09, 2011, 08:50:25 AM »

By TOM LAURICELLA And JUSTIN LAHART
After being pushed and pulled this year by tumult in the Middle East and the quake in Japan, the world's financial markets are increasingly being driven by economic fundamentals, including inflation and interest rates.

The winners in the shift have been precious metals and emerging-market currencies such as the Brazilian real and the Korean won—a sign of the growing split between healthier and still-sluggish quarters of the global economy such as Japan, the U.S. and parts of Europe.

 .The shift is roiling markets around the world. Several currencies and precious metals hit all-time or multiyear highs Friday. Some Asian governments intervened in the currency markets on two different days this week, buying billions of dollars to drive down the value of their soaring currencies, traders said.

Gold hit a new record and posted its biggest weekly gain in a year. Silver closed above $40 an ounce Friday for the first time in 31 years and has more than doubled over the past year.

Rising inflation is a key factor driving the emerging market currencies and precious metals. "For the longest time, people were concerned that inflation would start to build to levels where central banks are moved into action," says Mark Enman, head of global trading at Man Investments (USA) LLC. "That point was somewhere on the horizon, and now the horizon is here."

 .Investors who believe inflation can be tamed are buying currencies in countries where central banks are raising interest rates to control prices. So far this year, central banks in at least 18 developing economies have raised interest rates, according to RBC Capital Markets. That diverse list includes China, which raised rates this past week, along with Israel, Poland and Uruguay. Brazil and India were virtually alone in raising rates last year.

Those higher rates make the currencies more attractive, leading to big flows of capital into those countries. Brazil, after months of fighting the tide of money into the country, this week allowed its currency to rise sharply to help its own fight against inflation. Other central banks, especially in Asia, continue to battle investors who are bidding up the value of their currencies in order to protect the competitiveness of export industries.

The impact of rates was a focus this week when the European Central Bank raised interest rates by one-quarter of a percentage point, becoming the first central bank among the world's three major currencies to boost rates. The euro rose just over 1% against the dollar Friday, its biggest one-day gain since the start of the year, and is up 1.65% over the past week.

 
The U.S. currency also lost 1.4% against the Australian dollar and was even weaker against the Brazilian real, falling 2.7%.

The moves in gold and currencies come as economic officials are about to convene in Washington late next week for the annual spring meetings of the International Monetary Fund and World Bank. Officials from the Group of Seven developed economies meet Thursday, and the broader Group of 20 talks Friday.

High on the agendas is how the rest of the world will help Egypt and Tunisia revamp their economies. But currencies are always part of the conversation in these meetings, both in private and public comments. The wording of communiques is seen by officials and markets as a way for governments to send smoke signals to investors and to pressure each other.

The dollar and yen are weakening against nearly all global currencies because the relatively slow economic recoveries of America and Japan mean their central banks are unlikely to raise interest rates in coming months. After spiking to a record high after last month's Japanese earthquake, the yen has fallen more than 5% against the dollar in the past three weeks—a significant move for a major currency—and fell more against other currencies.

U.S. investors are worried about the Federal Reserve's "quantitative easing" plan of bond buying, which ends in June. In anticipation of lower demand for bonds from the Fed, they have been driving up the yields on U.S. Treasurys, which rose to their highest level in a month. The possible shutdown of the U.S. government over the budget impasse added to the anxiety.

The past few weeks have been a contrast to previous months, when worries about the European governments defaulting on their debts or of upheaval in Middle Eastern countries had assets moving in lock-step. When fear was the prevailing emotion, the dollar rose, and when investors were less worried, riskier assets ranging from the euro to oil to stocks took off.

Now, all different assets are moving based on their own fundamentals. U.S. stocks have continued to rise—even as the dollar sinks—because American corporations are profitable, strong and growing.

—Carolyn Cui and Matt Whittaker contributed to this article.
Write to Tom Lauricella at tom.lauricella@wsj.com and Justin Lahart at justin.lahart@wsj.com


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« Reply #180 on: April 09, 2011, 10:36:50 AM »

Can't wait for the Wesbury-spin on this.....


http://finance.yahoo.com/news/Rising-oil-prices-beginning-apf-1311732829.html?x=0

Rising oil prices beginning to hurt US economy

Rising oil prices beginning to hurt US economy, weakening the benefits of stronger job growth
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« Reply #181 on: April 13, 2011, 08:07:01 PM »

5 Things That Will Happen To You When America Goes Bankrupt



 Written By : John Hawkins


“Madness is rare in individuals – but in groups, parties, nations, and ages it is the rule.” — Friedrich Nietzsche
 
Does it seem too strong to call the way America deals with its debt “madness?” If not madness, then what? Denial? An addiction? However you phrase it, we’re a country that’s in deep trouble, but so many of us seem unable to deal with it.
 
Liberals in this country, for the most part, will admit that we’re running up “unsustainable” deficits. Yet, these same liberals adamantly oppose any and all serious efforts to do anything about it. If you move out from liberals to the general public, once again you’ll find plenty of people who admit that this nation has a huge problem. Yet, when you leave generalities, get down to specifics, and start looking for programs to cut, then suddenly everyone gets nervous and says, “never mind.” It’s like the old saying, “Everyone wants to go to heaven, but no one wants to die.”
 
Sadly, this is a natural outgrowth of ladling out public funds to special interests. There is so much collective money that few people feel or appreciate it even when billions are saved. Yet, if we yank even a few million away from special interest groups like PBS, Planned Parenthood, or the unions, they squeal like pigs that are about to accidentally be put in the wolves’ pen at the zoo.
 
In the face of that, people have to realize that this country is on pace to go bankrupt — and it could happen relatively soon if we don’t start taking serious steps to control our spending. Mike Pence thinks we could be just ten to fifteen years away. Tom Coburn is less optimistic and thinks it could happen in as little as five years. If that happens, we’re not a tiny country like Greece — we’re the biggest economy in the world. That means there’s no cavalry coming to pay our bills for us because we ARE the cavalry.

What happens then? Well, we don’t know for sure, but we can make some educated guesses about what COULD happen and how it will impact YOUR life.

1) Your life savings could be reduced to nothing almost overnight. Inflation is a fact of life. Thomas Sowell has noted, “As of 1998, a $100 bill would not buy as much as a $20 bill would buy in the 1960′s.” That’s under normal circumstances.

However, the thing governments have traditionally done when they simply can’t pay their debts is print more money. The problem with this is the further you expand the money supply, the less the money you already have on hand is worth. This can wipe out the savings of a lifetime in a relatively short period. Imagine spending billions of dollars just to buy a loaf of bread. Sound far-fetched? Well, guess what? That has happened in the Weimar Republic, which was crushed under debts from WWI and decided to pay it off by printing more money. It could happen here, too, and all the money you’ve scrimped and saved could become worthless in a short order.
 
2) Your taxes will skyrocket. We’ve been conned into thinking that we can fund a massive government on the backs of the rich. This is simply not so. It’s not working today and it’s not going to happen in the future. We cannot tax the rich enough to pay off our debt or even enough to keep the government going long-term. Even if we could, the rich have the resources to flee the country for greener pastures if they’re being taxed into oblivion. The middle class? Not so much.

What that means is the more desperate the government gets, the more the average American is going to be hammered with new taxes. How much more of your income can you afford to send overseas to pay China for the money they’ve loaned us to keep PBS, Planned Parenthood, and the National Endowment of the Arts going? What about if the country goes bankrupt and your income tax rate shoots up to fifty percent? How are you going to pay your mortgage? How are you going to feed your kids? When the government runs out of cash and it can’t borrow any more money, then it will start leveling massive taxes on the American people.
 
3) Your life could be in danger. If the government goes bankrupt, you’ll have an extremely angry, confused, and frustrated populace that has little faith in its leaders — combined with a horrific economy and a reduced ability of the government to keep order. Under those circumstances, widespread rioting and violent crime seem entirely plausible.
 
When Argentina had its crisis, violence went up 142% and “young men began looting supermarkets.”
 
Here’s some of what happened during the German hyperinflation of the currency in Weimar Republic after it started printing money night and day,
 

The flight from currency that had begun with the buying of diamonds, gold, country houses, and antiques now extended to minor and almost useless items — bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty thievery. Copper pipes and brass armatures weren’t safe. Gasoline was siphoned from cars. People bought things they didn’t need and used them to barter — a pair of shoes for a shirt, some crockery for coffee. Berlin had a “witches’ Sabbath” atmosphere. Prostitutes of both sexes roamed the streets. Cocaine was the fashionable drug.
 
4) Your payments from the government will dramatically decrease or stop altogether. Contrary to what some people believe, Medicare and Social Security are paid out of the same fund that pays for everything else. In other words, if the government goes bankrupt, there is no money set aside to pay for these programs. So, if you’re receiving Social Security, Medicare, welfare, food stamps, or any other similar programs, those checks could stop or be slashed down to nothing. That seems unthinkable to people, but if the government doesn’t have any money, then it can’t pay it out to people. As they say, “You can’t get blood out of a turnip.”
 
5) You will have a dramatically reduced standard of living. If taxes and inflation escalate dramatically, both of which are very likely if we go bankrupt, economic activity will slow to a crawl and we’ll go into a depression. We’re not talking about a “This is the worst economy since the Depression” situation that we hear every time there’s a mild downturn in the economy; we’re talking about a REAL depression. Businesses will close left and right, the stock market will tank, unemployment will soar to heights not seen since the thirties, and the government won’t be in a position to help very much.

If that happens in a country like America, where people have been so prosperous for so long, it’s going to produce utter misery. It’s not a lot of fun to be poor under the best of circumstances, but it’s much worse to go from having a comfortable life with a bright future to growing vegetables to eat in the backyard and wondering how you’re going to keep warm in the winter.
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« Reply #182 on: April 14, 2011, 11:11:44 AM »

http://finance.yahoo.com/news/BRICS-demand-global-monetary-rb-217782600.html?x=0&.v=3

SANYA, China (Reuters) - The BRICS group of emerging-market powers kept up the pressure on Thursday for a revamped global monetary system that relies less on the dollar and for a louder voice in international financial institutions.

The leaders of Brazil, Russia, India, China and South Africa also called for stronger regulation of commodity derivatives to dampen excessive volatility in food and energy prices, which they said posed new risks for the recovery of the world economy.

Meeting on the southern Chinese island of Hainan, they said the recent financial crisis had exposed the inadequacies of the current monetary order, which has the dollar as its linchpin.

What was needed, they said in a statement, was "a broad-based international reserve currency system providing stability and certainty" -- thinly veiled criticism of what the BRICS see as Washington's neglect of its global monetary responsibilities.

The BRICS are worried that America's large trade and budget deficits will eventually debase the dollar. They also begrudge the financial and political privileges that come with being the leading reserve currency.

"The world economy is undergoing profound and complex changes," Chinese President Hu Jintao said. "The era demands that the BRICS countries strengthen dialogue and cooperation."

In another dig at the dollar, the development banks of the five BRICS nations agreed to establish mutual credit lines denominated in their local currencies, not the U.S. currency.
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« Reply #183 on: April 14, 2011, 11:25:58 AM »

Can't say that I blame them.

The damage being done by our profoundly irrresponsible leadership is incalculable.
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« Reply #184 on: April 14, 2011, 11:26:56 AM »

Betcha QE 3 is coming soon.
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« Reply #185 on: April 14, 2011, 12:21:44 PM »

QE3 coming soon:  True, what choice do they have.  We spend more than we take in by 40%, ran out of buyers for new debt and just like the deepwater rig, we don't know how to turn off the spigot.  Interest rates stay artificially low because the monetary circle never gets completed.  We are calling something debt without finding a consenting lender. 
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« Reply #186 on: April 14, 2011, 12:26:36 PM »

Good thing the green jobs will save us!  rolleyes
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« Reply #187 on: April 14, 2011, 12:48:16 PM »

http://www.marketwatch.com/story/gasoline-prices-up-40-this-summer-us-says-2011-04-12

WASHINGTON (MarketWatch) — Gas prices will jump 40% for the summer driving season compared with 2010, according to a federal projection released Tuesday.

Retail prices for a gallon of regular-grade gasoline will average $3.86 from April through September, up from $2.76 for the comparable period last year, said the Energy Information Administration, the statistics arm of the Department of Energy.



 
The national price for gasoline may average $3.86 a gallon in the driving season, the EIA says.


In some areas, monthly average prices could top the national average by at least 25 cents a gallon.
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« Reply #188 on: April 14, 2011, 08:53:16 PM »

"Retail prices for a gallon of regular-grade gasoline will average $3.86 from April through September, up from $2.76 for the comparable period last year, said the Energy Information Administration, the statistics arm of the Department of Energy."

Elsewhere: "Feb 14, 2011 ... Obama seeks to raise DOE fiscal 2012 budget 12% to $29.5 billion"
-----
F^ckheads, excuse me, but I don't need a $30 billion agency to tell me gas price are going up.  Their job was supposed to be - DO SOMETHING ABOUT IT!

Close the department.  Only the EPA with good cause or the local protection authorities should have the power to slow down production of America's energy.  Energy production should be allowed up to the amount that we are using.
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« Reply #189 on: April 16, 2011, 11:07:55 PM »


http://www.businessweek.com/news/2011-04-16/texas-university-endowment-storing-about-1-billion-in-gold-bars.html

Texas University Endowment Storing About $1 Billion in Gold Bars
April 16, 2011, 4:51 PM EDT
By David Mildenberg and Pham-Duy Nguyen
 
April 16 (Bloomberg) -- The University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion and is storing the bars in a New York vault, according to the fund’s board.

The fund, whose $19.9 billion in assets ranked it behind Harvard University’s endowment as of August, according to the National Association of College and University Business Officers, added about $500 million in gold investments to an existing stake last year, said Bruce Zimmerman, the endowment’s chief executive officer. The holdings are worth about $987 million, based on yesterday’s closing price of $1,486 an ounce for Comex futures.

The decision to turn the fund’s investment into gold bars was influenced by Kyle Bass, a Dallas hedge fund manager and member of the endowment’s board, Zimmerman said at its annual meeting on April 14. Bass made $500 million on the U.S. subprime-mortgage collapse.

“Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services,” Bass said yesterday in a telephone interview. “I look at gold as just another currency that they can’t print any more of.”

Gold reached an all-time high of $1,489.10 an ounce yesterday in New York as sovereign debt concerns boosted demand for the metal as a store of value. Gold has climbed 28 percent in the past year on Comex.
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« Reply #190 on: April 17, 2011, 12:09:33 PM »

http://www.europac.net/pentonomics/goodbye_middle_class




Pentonomics - Goodbye Middle Class







Thursday, April 14, 2011
 



By: Michael Pento

Surprise! Bernanke now has to make a difficult choice. Despite the Fed’s best laid plans, inflation is soaring but the housing and job markets are dead in the water. I have been warning from the start of Quantitative Counterfeiting that the economy, housing market and the unemployment would not significantly improve—however, inflation would become a significant problem.
 
Today we received data on Initial Claims and inflation. Producer Prices increased by .7% from February to March and jumped 5.8% YOY. Meanwhile, the number of individuals filing first time jobless claims jumped by 27k to 412k for the week ended April 9th. Significantly rising prices and an anemic job market are the products of the Fed’s desire to crumble the currency. One of the so called unintended consequences of bailing out the banks is the destruction of America’s middle class.
 
For example, the average price of regular gasoline at the pump rose 11 cents to $3.77 a gallon in the week ended April 10, according to AAA. It climbed to $3.81 yesterday, the highest since September 2008. Yep, the highest gas prices since the market and economy crumbled in the summer of 2008. Real incomes are falling along with consumers’ discretionary purchasing power. But please keep in mind; this is what is known as a recovery in the eyes of our government.





Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.
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« Reply #191 on: April 18, 2011, 09:05:09 AM »

http://www.cnbc.com/id/42643384

S&P Affirms US AAA Rating, Cuts Outlook to Negative
Published: Monday, 18 Apr 2011 | 9:35 AM ET Text Size By: Reuters with CNBC.com


Standard & Poor's on Monday downgraded the outlook for the United States to negative, saying it believes there's a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures.

 

"Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," the agency said in a statement.

The S&P said the move signals there's at least a one-in-three likelihood that it could lower its long-term rating on the United States within two years.

The U.S. dollar fell broadly on word of the revision. Gold prices, meanwhile, hit a new record above $1,496 an ounce.

"The headline has enough of a shock value. The initial reaction is that this is negative for dollar assets across the board." said Lou Brien, a market strategist with DRW Trading in Chicago.
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« Reply #192 on: April 18, 2011, 10:16:45 AM »

Certainly not a surprise to anyone around here, but WOW nontheless , , ,  cry
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« Reply #193 on: April 18, 2011, 01:56:36 PM »

Rep. Paul Ryan’s statement on S&P’s fiscal warning to the US

Just in from Rep. Paul Ryan’s office, regarding the S&P rating announcement:
 

“We face the most predictable economic crisis in our history — a crisis driven by the explosive growth of government spending and debt. House Republicans took action last week to chart a new course by passing a budget that lifts our crushing burden of debt and puts our economy on the path to prosperity. By contrast, the President’s budget locks in Washington’s recent spending spree, adds $13 trillion to the debt over the next decade, and accelerates our nation toward a fiscal crisis. The failure to advance solutions threatens not only the livelihoods of future generations, but also the economic security of American families today. A campaign speech is no substitute for a serious, credible budget. The President and his party’s leaders must put an end to empty promises and work with us to avert this looming economic crisis.”
 

To learn more about House Republicans’ plan to avert the crisis and chart a better future: http://budget.house.gov/fy2012budget
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« Reply #194 on: April 18, 2011, 02:42:42 PM »

http://finance.yahoo.com/banking-budgeting/article/112563/BRICS-move-dollar-aside-marketwatch?mod=bb-budgeting%20&sec=topStories&pos=3&asset=&ccode=

BRICS Make Move to Shove Dollar Aside

 by David Marsh
Monday, April 18, 2011

China and four other leading high-growth economies have taken landmark steps toward lowering the importance of the dollar in international financial transactions — part of a seminal shift in the move towards a multicurrency reserve and trading system.

Mind you, you wouldn't get an idea of anything dramatic from reading the official Chinese press on the conclusion of a summit meeting of the so-called BRICS economies (Brazil, Russia, India, China and South Africa) in the southern resort twin of Sanya in southern China last week.

"Leaders call for peace and prosperity" was the front-page headline in the China Daily. Stirring stiff. Even more striking was the prominent story the previous day that China's President Hu Jintao and visiting Brazilian President Dilma Rousseff had agreed to quicken trade procedures for "gelatin, corn, tobacco leaf, bovine embryos and semen." At least we know there's no holding back the Chinese rhetorical flourishes on these issues.

Leave aside the whimsical acronyms. Addition of South Africa to the former BRICS format seems to have galvanized the grouping. The five countries agreed to expand use of their own currencies in trade with each other — an important step toward putting the dollar into a new downsized place. One key influence is the annual expansion of China's trade volume with other core countries by 40% in 2010 — and the buoyancy looks set to continue. The BRICS' state development banks, including the China Development Bank, agreed to use their own currencies instead of the dollar in issuing credit or grants to each other — and they will also phase out the dollar in overall settlements and lending among each other.
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« Reply #195 on: April 19, 2011, 07:35:14 AM »


http://oceanaris.wordpress.com/2011/04/18/economic-storm-warning/

Economic Storm Warning

 Posted on April 18, 2011 by Matt Holzmann


Today’s Telegraph informs us that the yields on Greek, Spanish, Irish, and Portuguese debt climbed to record levels today, and that Irish bank debt has been cut to junk status. In the meantime, Finland’s political tilt rightwards in yesterday’s elections portend a possible veto of any plans by the European Central Bank to bail out these economies on terms unfavorable to the EC member countries paying the bills.
 
Greece is now paying 19.7% on 2 year bonds and there is a real fear of government default. This will put even more pressure on the other PIIGS, who are either on or already over the edge. The question then becomes which economies are triaged. Greece, Iceland, and Ireland are all moribund. Portugal is in the middle of a political crisis, and Spain is teetering on the edge. We are seeing the slow motion destruction of the economic and social programs that helped these economies enter the 21st century. It is hard to believe where these countries ranked economically and demographically even 25 years ago.
 
The Standard & Poor’s downgrade of U.S. debt is, in my opinion, similar to their downgrade of subprime debt in 2007. Too late and out of touch.
 
Meanwhile, our government reported that inflation remained stable last month. Core inflation, rose only 0.1% to 1.2%, we are told. The gross inflation rate was 2.7% year over year. And yet anyone who has been to the market in the past 4 months has seen the steady rise of prices. While food and oil are not calculated in the core inflation rate because of their volatility, what then explains the rise in air fares, used car prices, imports, industrial goods, etc, etc, etc.? As Churchill once said “lies; damned lies, and statistics”. Our government is not being on the up and up with us.
 
China’s currency has risen 25% in the past 4 years and wages are skyrocketing. Commodities prices across the board have been rising for the past 3 years and many are at or near all time highs.
 
All of these numbers and trends have been well documented. It just doesn’t seem as if too many of the people in charge are paying close attention. Or perhaps they are and are simply waiting for the tidal wave to hit. The discussion in Washington dithers and is hijacked by petty political agendas. And yet the warnings cannot be more clear. When S&P warns you and the ICB warns you and the IMF warns you and the Chinese are getting together with the Russians and Brazilians and Venezuelans and Iranians to create alternative global financial structures, it doesn’t get clearer.
 
The crisis is by no means limited to the United States, but what happens here will have a massive impact worldwide. After all, we live in a truly global economy. Almost every country in the world will face serious repercussions from any of the potential negative financial scenarios outlined above. There is no such thing as a free lunch; a fact which has been forgotten by the economists and politicians. The options are not especially palatable, but just like with castor oil we must swallow our medicine now or face a dire future.
 
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« Reply #196 on: April 19, 2011, 05:02:54 PM »


Dueling Fixed Income heavy hitters:


"The bonds that PIMCO’s Bill Gross sold to take a 3% short position in the Treasury market may have found a buyer in Doubleline’s Jeffrey Gundlach."




Gundlach: Treasuries will Rally When QE2 Ends
By Robert Huebscher
April 19, 2011


 
The bonds that PIMCO’s Bill Gross sold to take a 3% short position in the Treasury market may have found a buyer in Doubleline’s Jeffrey Gundlach.  In a conference call with investors last week, Gundlach said that Treasury prices would rise in the near term, once QE2 expires on June 30.




For over a year, Gundlach has forecast a “long-term bottoming process” in government bond yields.  Last week he said he remains committed to that outlook.





If you are a buy-and-hold investor with a 10-year horizon, Gundlach said, you should position your portfolio with the expectation of inflation. But he doesn’t expect inflation to unfold any time soon.  “I am not in the camp that believes Treasury rates are about to rocket higher because of the end of QE2,” he said.  “I think just the opposite, actually.”




The $236 billion in Gross’ Total Return fund makes him the world’s largest bond investor, dwarfing the $6.1 billion in Doubleline’s Total Return fund.  But Gundlach’s performance record over the past decade, including the results at his previous employer, TCW, has surpassed Gross’.   That helps explain why Doubleline’s Total Return fund just celebrated its first anniversary by establishing a new record for assets gathered in in its first year and why Gundlach’s comments are closely followed by market observers.




I’ll look at the assessment of the economic and market conditions that underlies Gundlach’s contrarian position in the Treasury market, and I’ll also discuss why another prominent bond manager, Hoisington Investment Management, reached the same conclusion as him but for different reasons.




The elephant in the kitchen




A common theme in Gundlach’s analyses over the last several years has been increasing total credit market debt as a percentage of GDP, which peaked at 365% in 2009 and had dropped only slightly to 345% as of the end of 2010. The slight dip was caused by consumer deleveraging, but the underlying trend remains.





Gundlach called this debt the “elephant in the kitchen,” because it dominates the fundamentals underlying the investment markets.




The challenge investors face, Gundlach said, is figuring how that debt will be repaid, while at the same time funding the liabilities of federal entitlement programs, without debasing the dollar.





The present level of federal borrowing will detract from future economic growth and productive investments, Gundlach said.  “That is not a good framework, and this is why we are having so much trouble now in Washington, DC,” he said.




In the 1940s, federal receipts as a percentage of debt, as shown in the chart below, were as precarious as they are now, with debt equal to ten times receipts.  Gundlach said that imbalance was corrected with tax increases, with tax receipts rising from 5% to 20% of GDP in the 1940s. As a result, debt decreased to merely two times receipts in 1980.  But that was when consumer leveraging accelerated, putting us back where we were 70 years ago.




The problem, Gundlach said, is if interest rates go up it would cause a “really difficult fiscal situation” with interest expenses.  “We really need to get this in order if we are going to be on a sound footing,” he said.



Gundlach noted that the Office of Management and Budget (OMB) has estimated that the government’s fiscal position will improve slightly over the next four years, but he said he is skeptical of those forecasts.




Slow growth ahead




The Federal Reserve, thanks to its quantitative easing policies, is now the largest purchaser of government debt, supplanting China for that distinction.  The latest round, a $600 billion bond-buying program dubbed QE2, is set to end on June 30.  “That is going to be a moment of truth for the US economy,” Gundlach said.





Without further monetary stimulus and with conservative fiscal policies like the $38.5 billion in budget cuts recently passed by Congress, Gundlach said the US economy will weaken substantially.




“If we are going to stop stimulating the economy to the tune of $1.65 trillion a year, it is blatantly obvious that the economy will suffer pretty dramatically if a true budget-cutting exercise were to take place,” Gundlach said.




Gundlach called the direction of proposed fiscal policies an “austerity program,” which by definition means lower economic growth.  “It's a little late to be starting that, because it is going to be really painful,” he said. “My view is that it is going to be so painful that it is going to be abandoned, and that is when the inflationists might be right.”




One likely outcome will be increased taxes on individuals, particularly wealthy ones.  Gundlach said that taxes would need to rise from 20% to 35% of GDP to solve federal debt problems.  He considers an increase of that magnitude likely, but he said that top marginal tax rates could increase to 60%.




The market reaction to prior quantitative easing events




Turning to Gundlach’s interest rate forecast, he said it is critical to review the market’s reaction to various monetary policies over the last several years, as shown in the graph of the 10-year Treasury bond below:






QE1 was announced (the first red arrow on the left) amid and because of a global banking panic, Gundlach said.   The result was a continued decline in rates that ended in December of 2008.





When the purchases actually began, though, bond yields started to rise.  That was counterintuitive, Gundlach said, because government’s buying actions should have pushed prices up and yields down.  His explanation was that bond investors get nervous when there is a strong inflationary-biased policy.   While government buying supported the prices of newly issued securities, investors holding the other $8 trillion of Treasury bonds were unsettled and pushed yields on the 10-year from 2% to 4%. 





When QE1 was extended, yields rose even further.




On March 31, 2010, purchases from QE1 ended and bond yields collapsed.  Gundlach said this was probably because the stimulus that quantitative easing represented was withdrawn, and that hurt the economy. The withdrawal of QE1 may have also made bond investors feel better that inflationary policies were no longer being pursued.





“The implementation of quantitative easing has produced exactly the opposite market behavior that some people intuitively expected,” he said. 





When QE2 was announced, yields bottomed, and when bond purchases began, yields rose.




“The idea that ending QE2 would necessarily mean a rate rise flies in the face of the bloodless verdict of the market,” he said, “which is that when quantitative easing was in place, bond yields rose, and when it was taken off it led to weaker economy and rates falling.  I think that is going to happen again.”





Gundlach also said that the start of QE1 triggered a rally in equities, and that rally was amplified when QE1 was extended.  When QE1 ended, stocks fell.  Stocks rallied again when Bernanke made his speech in Jackson Hole announcing QE2 and rallied again when the buying program began.  Gundlach said he expects that pattern to repeat, and that stocks will go down when QE2 ends.  “The discounting for that should be starting in the relatively near term,” he said.





Gross has not spoken publicly about his decision to short the Treasury market.  But in his last monthly commentary, he offered the likely explanation – his disgust with Congress’ inability to address its debt burden and, in particular, federal entitlement programs.  He wrote that the inevitable outcome would be higher inflation or its equivalent, a declining dollar.




Gross also wrote that the government could manage its debt “stealthily via policy rates and Treasury yields far below historical levels – paying savers less on their money and hoping they won’t complain” – and that policy direction supports Gundlach’s position.




More support for a bond rally




Texas-based Hoisington Investment Management supervises over $4 billion in fixed-income assets.  In their most recent commentary, the firm’s principals, Van Hoisington and Lacy Hunt, were sharply critical of the Fed’s quantitative easing policy.  They argued that it encouraged speculation, slowed economic growth and “eviscerated” the standard of living for the average American family.





On their last point, Hoisington and Hunt cited the “misery index,” which combines the unemployment and inflation rates.  This metric was less than 7% prior to the financial crisis.  Since the Fed announced QE2 in the second quarter of last year, it has risen from 9.1% to an estimated 14% in the current quarter. 





“The Bernanke Fed provides fresh confirmation that trying to substitute higher inflation for lower unemployment harms the economy,” they wrote.





Hoisington and Hunt concurred with Gundlach, arguing that the end of QE2 will bring about lower interest rates.  It will not restore the Fed’s balance sheet to a “reasonable size,” they said, but it will reinforce the actions of the other major central banks (the ECB, the People’s Bank of China, and the Bank of England), which have all commenced raising interest rates.





“The global upturn in inflation will reverse, thereby placing the global economy on a more stable footing,” they wrote.




Hoisington and Hunt advised investors to move gradually into Treasury securities, although they warned (as did Gundlach) that the economy would slow in the second half of this year.   Deflation will be the dominant theme, creating a favorable environment for holders of long-dated Treasury bonds.  “Positioning for an inflation boom will prove to be disappointing,” they said.





The likelihood of QE3




What if Gundlach, Hoisington and Hunt are correct and the economy slows appreciably in the second half of this year?  Tighter Fed policy, rising interest rates and higher commodity prices could combine to bring about that outcome.





In an email exchange, Gundlach wrote that slower growth could also be a consequence of “a well-intentioned attempt to rein in the out-of-control budget deficit through tax hikes and spending cuts. “

If so, then pressure will build for another round of quantitative easing.




“When a debt-logged economy experiences even a moderate growth slowdown, the deflation winds begin to blow,” Gundlach wrote.  “When that happens, the population will be screaming for QE3, and so they will get it.”





For active managers like Gundlach, the challenge will be to anticipate the Fed’s moves, assess market sentiment and correctly position their portfolios on the yield curve – a challenge that Gundlach has more than met over the last decade.   





In light of Gundlach’s advice, however, a long-term buy-and-hold investor should simply position his or her portfolio for inflation.


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G M
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« Reply #197 on: April 19, 2011, 05:42:16 PM »

PIMCO's take:


http://www.pimco.com/EN/insights/pages/skunked.aspx

Skunked

•Medicare, Medicaid and Social Security now account for 44% of total federal spending and are steadily rising.
•Previous Congresses (and Administrations) have relied on the assumption that we can grow our way out of this onerous debt burden.
•Unless entitlements are substantially reformed, the U.S. will likely default on its debt; not in conventional ways, but via inflation, currency devaluation and low to negative real interest rates.
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« Reply #198 on: April 20, 2011, 10:48:03 AM »

New DNC talking point: "Standard and Poor's is RaaaAAAAAaaaacist"!

http://hotair.com/archives/2011/04/20/wh-tried-to-keep-sp-from-issuing-bond-warning/

WH tried to keep S&P from issuing bond warning
 
posted at 11:36 am on April 20, 2011 by Ed Morrissey

 
In the wake of the bond warning issued by Standard & Poor’s yesterday, some have argued that the controversy helps Barack Obama in demanding adoption of his deficit-reduction plan.  However, today’s report by the Washington Post shows that the White House itself disagreed, as it tried to convince S&P to stay silent on American debt.  The new information gives ammunition to Republicans (via JWF):
 

The Obama administration privately urged Standard & Poor’s in recent weeks not to lower its outlook on the United States — a suggestion the ratings agency ignored Monday, two people familiar with the matter said. …
 
Treasury officials told S&P analysts that they were underestimating the ability of politicians in Washington to fashion a compromise to curb deficits, a Treasury official said. They argued a change in ratings was not needed at this time because the debt was manageable and the administration had a viable plan in the works, the official said.
 
But S&P analysts told Treasury officials on Friday that they were unmoved — and released a report that expressed skepticism that the political parties could come together on how to bring spending in line with revenue.
 
Obama’s plan certainly looks like a key component of that skepticism.  What does it tell us that Treasury made the argument that the President’s “plan” would solve the problem, and that S&P still issued the warning?  It sounds as if S&P doesn’t think much of the plan, nor of the White House’s ability to work with Congress to produce something more realistic.
 
Jim Pethokoukis at Reuters shows why S&P shouldn’t have been impressed at all with Geithner’s presentation, putting the most damning facts last in a series of points, emphases his:
 

5) Those savings – 2.4 percent for Obama, 3.5 percent for Ryan — are over ten years vs. cumulative GDP of $196 trillion over 2012-2021 (not counting interest expense). In dollar amounts, that works to savings of $4.7 trillion for Obama and $6.9 trillion for Ryan. So the Ryan Path saves $2.2 trillion more.
 
6) But that’s not all! The Obama Framework likely uses the same higher growth assumptions as Obama’s February budget. When CBO re-ran that budget using its own gloomier forecast, it found the Obama plan raised $1.7 trillion less than it claimed. Ryan uses the CBO numbers. So a back-of-the-envelope estimate — adjusted for similar economic assumptions — finds the Obama Framework would only save $3 trillion vs. $6.9 trillion for the Ryan Path over ten years. And nearly 2/3 of Obama’s savings comes from higher taxes (net interest).
 
Also, remember that Obama pledged to save $4 trillion off of his previous budget projections, which raised spending significantly.  Ryan takes off the additional spending and starts gaining traction on the structural deficit at the same time.  Using vouchers instead of a single-payer system for Medicare, Ryan’s plan controls costs for the government in a much more predictable fashion than Obama’s IPAB-driven ObamaCare plan, which is now under bipartisan assault after his proposal last week.
 
Obama’s plan relies more on significant and sustained economic growth rather than cuts in spending.  Rasmussen’s new consumer-confidence numbers in the wake of the S&P warning puts up a big red flag on those expectations:
 

Consumer and Investor confidence in the economy has fallen sharply in the wake of Standard and Poor’s announcement that it shifted the U.S. credit outlook from stable to negative. Investor confidence is now at the lowest level since last September.
 
The Rasmussen Consumer Index, which measures the economic confidence of consumers on a daily basis, has fallen eight points since Monday morning to 74.4. This Wednesday, consumer confidence is down six points from a week ago, down two points from a month ago, and down eleven points from three months ago. It is just a single point above the lowest level of 2011.
 
The Rasmussen Investor Index fell six points today to a seven month low.  At 81.1, the Investor index down nine points since the S&P announcement, down eight points from a week ago and down thirteen points from the beginning of the year. Investor confidence in the economy is now at the lowest level since last September 18.
 
If consumers retreat from the marketplace again — a distinct possibility before this because of rising prices on gas and food — then the recovery that produces all that tax revenue will never materialize.  That’s why deficit reduction that relies on taxes and Pollyanna predictions of economic growth didn’t impress S&P, and won’t impress bondholders in the long run.  We need to cut spending, especially on entitlements, and the economy will respond vigorously when we settle our financial disorder accordingly.
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« Reply #199 on: April 20, 2011, 11:00:47 AM »

http://keithhennessey.com/2011/04/19/sp-credit-report/

Understanding the S&P report


Posted April 19, 2011


Yesterday’s report by Standard & Poor’s on the U.S. government’s credit rating is driving headlines. You can learn a lot more from reading the primary source document than from news coverage of it.
 
Here is what S&P did:
 

On April 18, 2011, Standard & Poor’s Ratings Services affirmed its ‘AAA’ long-term and ‘A-1+’ short-term sovereign credit ratings on the United States of America and revised its outlook on the long-term rating to negative from stable.
 
The news is in the latter part: S&P downgraded its “outlook on the long-term [credit] rating [of the U.S. government].” This is a warning sign.
 
S&P told us why they downgraded their outlook:
 

We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.
 
… Despite these exceptional strengths, we note the U.S.’s fiscal profile has deteriorated steadily during the past decade and, in our view, has worsened further as a result of the recent financial crisis and ensuing recession. Moreover, more than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on a strategy to reverse recent fiscal deterioration or address longer-term fiscal pressures.
 
In 2003-2008, the U.S.’s general (total) government deficit fluctuated between 2% and 5% of GDP. Already noticeably larger than that of most ‘AAA’ rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover.
 
The S&P analysts base their outlook downgrade on a legislative assessment that I think is accurate:
 

We view President Obama’s and Congressman Ryan’s proposals as the starting point of a process aimed at broader engagement, which could result in substantial and lasting U.S. government fiscal consolidation. That said, we see the path to agreement as challenging because the gap between the parties remains wide. We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible.
 
Standard & Poor’s takes no position on the mix of spending and revenue measures the Congress and the Administration might conclude are appropriate. But for any plan to be credible, we believe that it would need to secure support from a cross-section of leaders in both political parties.
 
If U.S. policymakers do agree on a fiscal consolidation strategy, we believe the experience of other countries highlights that implementation could take time. It could also generate significant political controversy, not just within Congress or between Congress and the Administration, but throughout the country. We therefore think that, assuming an agreement between Congress and the President, there is a reasonable chance that it would still take a number of years before the government reaches a fiscal position that stabilizes its debt burden. In addition, even if such measures are eventually put in place, the initiating policymakers or subsequently elected ones could decide to at least partially reverse fiscal consolidation.
 
Let’s tease this apart.  S&P describes three distinct but related risks:
 1.The risk of no agreement on a medium-term fiscal strategy before the 2012 election;
 2.The risk that, if there is an agreement, it will be phased in too slowly;
 3.The risk that delay plus a slow phase-in allows enough time for future policymakers to partially undo an agreement.
 
I think all three are valid concerns, and I share their skepticism.
 
They describe other short-term fiscal risks that worry them as well:
 •the risk of further financial bailouts;
 •the potential cost of “relaunching” Fannie Mae and Freddie Mac, which they estimate at “as much as 3.5% of GDP (!!!);
 •the risk of losses on federal loans (they single out student loans).
 
The first bullet here is scary, and they emphasize it: “Most importantly, we believe the risks from the U.S. financial sector are higher than we considered them to be before 2008.”
 
S&P comments on three elements of recent deficit reduction proposals: income tax rates, entitlement reform, and the President’s new trigger.
 
On income tax rates:
 

Revenue [in the President’s new proposal] would be increased via both tax reform and allowing the 2001 and 2003 income and estate tax cuts to expire in 2012 as currently scheduled—though only for high-income households. We note that the President advocated the latter proposal last year before agreeing with Republicans to extend the cuts beyond their previously scheduled 2011 expiration. The compromise agreed upon in December likely provides short-term support for the economic recovery, but we believe it also weakens the U.S.’s fiscal outlook and, in our view, reduces the likelihood that Congress will allow these tax cuts to expire in the near future.
 
Note that they are commenting on both the fiscal effects of the deal, and how it affects their assessment of the legislative viability of the President’s recent proposal.
 
On the President’s new trigger proposal:
 

We also note that previously enacted legislative mechanisms meant to enforce budgetary discipline on future Congresses have not always succeeded.
 
This is a poke at the credibility of the President’s trigger mechanism.
 
On entitlement reform:
 

Beyond the short-term and medium-term fiscal challenges, we view the U.S.’s unfunded entitlement programs (Social Security, Medicare, and Medicaid) to be the main source of fiscal pressure.
 
Note that they agree with Chairman Ryan (and me) that entitlement spending is “the main source of fiscal pressure.”
 
S&P scolds American policymakers by comparing them to their counterparts in other countries.  The U.K., France, Germany, and Canada have all begun implementing austerity programs, even while they suffered recessions comparable to or larger than what we had here in the U.S.
 
S&P concludes with a concrete probability assessment:
 

The negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years. The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.

They also tell policymakers the standard against which they will be judged:
 

Some compromise that achieves agreement on a comprehensive budgetary consolidation program—containing deficit reduction measures in amounts near those recently proposed, and combined with meaningful steps toward implementation by 2013—is our baseline assumption and could lead us to revise the outlook back to stable. Alternatively, the lack of such an agreement or a significant further fiscal deterioration for any reason could lead us to lower the rating.
 
S&P is telling Washington, that to avoid a possible downgrade, they need to do a deal “in amounts near [$3-4 trillion over the next decade]” and “with meaningful steps toward implementation by 2013.”
 
In yesterday’s press briefing, White House Press Secretary Jay Carney disagreed with S&P’s skepticism about a deal:
 

As for its political analysis, we simply believe that the prospects are better. We think the political process will outperform S&P expectations. The President is committed, as he made clear in his speech on Wednesday, to moving forward in a bipartisan way to reach common ground on this important issue of fiscal reform.  And he believes that the fact that Republicans — that he and the Republicans agree on a target — $4 trillion in deficit reduction over 10 to 12 years — is an enormously positive development.  They also agree that the problem exists.  So the third part is the hard part, which is reaching a bipartisan agreement.  But two out of three is important.  And it demonstrates progress.
 
My view
 
There is a high probability of incremental spending cuts being enacted this year and next as part of debt limit legislative struggles.  I’ll make a wild guess of $100B – $300B over 10 year range.
 
There is a moderate chance (1 in 3) of an incremental, slightly bigger (maybe $300B – $500B over 10 years) deficit reduction deal before the 2012 election. The President would trumpet such a deal as a good first step, but it appears this would fall far short of what S&P says is needed.
 
Given the President’s apparent budget strategy, there is at the moment a vanishingly small chance of a big medium-term or long-term deal like that described by S&P as necessary to avoid a possible downgrade, ($3-4 trillion over 10 years, with even bigger long-term changes to Social Security, Medicare, and Medicaid).
 
The greatest obstacle to constructive negotiations is the President’s attack rhetoric, in which he today accused Congressional Republicans of “doing away with health insurance for … an autistic child” and potentially causing future bridge collapses like the one in Minnesota that killed 13 people.
 
Maybe the S&P report will scare the President’s team into treating the long-term problem seriously rather than using it as a campaign weapon. I’m not holding my breath.
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