JH Virginia, September 9th, 2011, 11:30 pm: "The idea that bombs, for a controlled demolition, were planted inside the Trade Center buildings is just incredibly stupid. Building security and maintenance would have had to be in on it and that is unbelievable. Please just shut up and go away." (Recommended by 13 Readers)
Robert Cicero, Tuckahoe, NY, September 9th, 2011, 11:35 pm: "These people need professional psychiatric help; they do not need soapbox from which to spout this nonsense." (Recommended by 15 Readers)
david sarasota, September 10th, 2011, 12:27 am: "the u.s.a. allows nuts and deniers to roam free. that's one of the things that makes us a great country. but boy it would be nice to have a way to make them shut up." (Recommended by 8 Readers)
Jeffrey U.S.A., September 10th, 2011, 8:05 pm: "Truthers have about as much credibility as those conspiracy nuts that thought the world was coming to an end back in May! And just like the doomsday nuts the truthers don't seem to realize how utterly ridiculous their behavior is! Truthers refuse to look at the countless scientific studies and unbiased journalistic investigations that have time and time again debunked the conspiracies! Instead truthers are drawn to Youtube vids and outrageous websites probably created by losers sitting in their mom's basement!" (Recommended by 1 Reader)
J. Edgar Hoover: "The individual is handicapped by coming face-to-face with a conspiracy so monstrous he cannot believe it exists."
9/11: Evaporation of Steel
Feel free to download the complete 9/11 web page from here (9_11.zip), for off-line reading and email distribution. Once you unzip the file (please do it on drive [C:]), it will create a new folder on your hard drive (C:\9_11). Open this new folder, find 9_11.html and launch it with your web browser.
WTC dust contains steel, ABC,
19:35, 9/13/2001
The best guess for the missing 1200 feet of material:
"... large portions simply vaporized into the dust... "
This is what we should have seen, according to computer simulations: all 47 core steel columns standing naked and unsupported in the air, and then falling down. Instead, the core columns were removed — evaporated — before the collapse. Otherwise you just can't demolish the towers. No way.
On 9/11/2001, the real (not fake) UA Flight 93 made an emergency landing in Cleveland. Ten years later, the fate of the passengers and crew is still unknown.
"Letters – Flight 93 was carrying 7,500 pounds of mail to California – and other papers from the plane were found eight miles (13km) away from the scene of the crash. A sector of one engine weighing one ton was found 2,000 yards away. This was the single heaviest piece recovered from the crash, and the biggest, apart from a piece of fuselage the size of a dining-room table. The rest of the plane, consistent with an impact calculated to have occurred at 500mph, disintegrated into pieces no bigger than two inches long. Other remains of the plane were found two miles away near a town called Indian Lake. All of these facts, widely disseminated, were confirmed by the coroner Wally Miller."
These are the unexplained and indisputable facts, documented in the official video footage from 9/11, which are discussed in my 9/11 web page. Notice also the video documentaries from CNN (regarding AA Flight 77) and from FOX and NBC (UA Flight 93): the only pieces you can see "are small enough that you can pick up in your hand" (Jamie McIntyre), and "nothing larger than a phone book", regarding the alleged crash of some unidentified object in PA.
Therefore, the passengers from the real AA Flight 77 and UA Flight 93 could be still alive — right now, as we speak.
Nobody seems to care.
Jesse Ventura, 37:06-37:11, '911 Pentagon Attack', December 17, 2010: "This is where the records of that missing 2.3 trillion dollars were kept. This is where all the financial people were killed."
Watch Jesse Ventura interview here. Book available here.
I am immensely disappointed from the lack of interest in my efforts to initiate an honest investigation of 9/11, which may also prevent any
war on Iran. I hope and pray that my fears will turn out to be groundless, and nobody will never ever bomb
Iran. Amen.
D. Chakalov December 29, 2010, 03:45 GMT Latest update: September 11, 2011, 14:34:30 GMT
Mike Gravel,
02:27-04:38: "All I can say about what the
United States
is doing, it is immoral. As a result of 9/11, we have altered our moral
compass,
and people begin to getting used to brutalizing each other."
---------------------
Peter Schweizer, Throw Them All Out. Hardcover, 240 pages,
Houghton Mifflin,
November 15, 2011
Chapter 1 - John Kerry; Tom Carper;
Melissa Bean; Jared Polis;
James Oberstar; Jeb Bradley; John Boehner; Jim McDermott;
Amo Houghton; Johnny Isakson; Sheldon Whitehouse.
Chapter 2 - Max Baucus; Jim Moran; Dick Durbin; Rahm Emanuel.
Chapter 3 - Nancy Pelosi; Gary Ackerman.
Chapter 4 - Dennis Hastert; Carolyn Maloney; Judd Gregg; Ken Calvert;
David Hobson; Heath Shuler; Bennie Thompson; Maurice Hinchey;
Jerry Lewis; Harry Reid.
The book goes into such trades that Al Gore made in which he and a
Silicon Valley investor put in $16 million into a company before a $25
million
grant was issued by the federal government, after which Gore's initial
investment
turned into $89 million.
---------------------
“I must start by pointing out that three years after a horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail and that’s wrong.”
FCIC - Financial Crisis Inquiry Commission. The one and only attempt to "explain" why a handful of banks received trillions of "no strings" attached handouts after engaging in fraud and reckless gambling on an epic scale.
The US spent $8 million investigating this staggering financial catastrophe which has cost the US about $8 trillion dollars (and climbing) but FIVE TIMES AS MUCH on the explicit details of Clinton's sexual adventures. ---------------------------
Federal Reserve $9 Trillion Off-Balance Sheet Transactions ?
Rep. Alan Grayson, May 5, 2009: “Do you know who received that money?”
“What have you done to investigate the off-balance-sheet transactions conducted by the Federal Reserve which, according to Bloomberg, now total $9 trillion in the last 8 months?”
Senator Byron Dorgan, February 3, 2009: “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”
U.N.: 2010 deadliest year for Afghan civilians By Laura King, Los Angeles Times, March 10, 2011
"The U.N. mission in Afghanistan put the number of civilians killed last year at 2,777, a 15% increase from the previous year. About three-quarters of those deaths were caused by insurgents, the report said. (...) As it did in the previous year, the report charted a drop in the proportion of deaths — to 26% — caused by the Western military. But the current year already has seen several high-profile instances of casualties at the hands of the NATO force, including nine boys killed last week as they gathered firewood on a mountainside."
26% from 2,777 is 722. Why were these 722 civilians murdered?
p. 50: "The economic importance of the Middle East with its energy supplies hardly needs emphasis. Whatever the outcome of the conflicts in Iraq and
Afghanistan, U.S. forces will find themselves again employed in the region on numerous missions ranging from regular warfare, counterinsurgency, stability operations, relief and reconstruction, to engagement operations. The region and its energy supplies are too important for the U.S., China, and other energy importers to allow radical groups to gain dominance or control over any significant portion of the region.
p. 53: "Furthermore, the Iranian regime is pressing forward aggressively with its own nuclear weapons program. The confused reaction in the international community to Iran’s defiance of external demands to discontinue its nuclear development programs may provide an incentive for others to follow this path.
"Unless a global agreement to counter proliferation is successful, the Joint Force must consider a future in which issues of nuclear deterrence and use are a primary feature."
A possible variation à la Glenn Beck: Unless Iran unconditionally agrees to have each and every square foot from its nuclear development facilities monitored 24/7 with video cameras -- indefinitely, for as long as we want -- a sustainable and verifiable global agreement to counter proliferation of nuclear developments cannot be envisaged. Whatever the outcome of the conflicts in Iraq and
Afghanistan, the threat level from Iranian-backed radical groups seeking dominance over any significant portion of the region may continue to be unacceptable, which would require the Joint Force to consider these matters as 'primary threat' to the freedom of people, prosperity of nations, and democracy in the world. It is our utmost duty and responsibility to protect the Free World ...
No, no. NO. Do not bomb Iran. Do not
even think about it.
D. Chakalov January 30, 2011, 18:18 GMT
2:08-2:17: "Pick your city. Tell me which one you want gone. Seattle? LA? Boston? New York? Miami?"
Joel Rosenberg (Year-End Assessment of the Iranian Threat, December 20, 2010) believes there will be no strike on
Iran "at least until the fall of 2011, given the progress that has been made in slowing Iran down."
As to those who believe that nobody will bomb
Iran, recall the history of the first war. See how easy was to fool people:
Or recall the second Tonkin Gulf incident on August 4, 1964, which actually didn't happen. The truth was declassified in 2005. Too late: 2 million Vietnamese and 58,000 U.S. soldiers died.
How long are you prepared to wait for the truth about 9/11 ?
Former Vice President Dick Cheney calls for a more forceful U.S. posture on Iran and says he would applaud an Israeli strike on the country's nuclear facilities.
Obama administration 'supplied bunker-busting bombs to Israel'
By Julian Borger, The Guardian,
September 27, 2011
Newsweek is reporting that Israel has received 55 US-made
GBU-28 bunker-busting bombs, citing it as evidence that
the US-Israeli military relationship is deeper than ever...
Haaretz.com,
November 4, 2011: President Shimon Peres believes
that Israel and the world may soon take military action against
Iran.
Persian Gulf Option One: A False Flag
By Patrick Henningsen, Infowars.com,
January 25, 2012
"Why would the US be sending its soon-to-be decommissioned,
rusty chess piece – the 50 year old nuclear-powered USS Enterprise carrier
into the line of fire in the Persian Gulf ? A very large and expendable,
floating
museum, and one which, interestingly enough with its six on board nuclear
reactors…
would probably cost a fortune to dispose of."
July 9, 2008: Dick Cheney's plan for a false flag in the Strait of Hormuz
Cheney would have Navy
Seals, disguised as Iranians, to attack US Navy vessels,
resulting in the Seals' deaths, and in the justification for
an American
attack on Iran.
Sy Hersh claims that this was only 1 of 12 ideas to get a war with
Iran started.
----------------------------
"It seems to us to be
urgent, because the Iranians are deliberately drifting into
what we call an immunity zone where practically no surgical operation
could block them."
Pentagon Seeks
Mightier Bomb vs. Iran
By A. Entous and J. E. Barnes, WSJ,
January 28, 2012
A senior defense official said the U.S. had other options besides the MOP
to set back Iran's nuclear program. "The Massive Ordnance Penetrators
are by no means the only capability at our disposal to
deal with potential nuclear threats in Iran," the official said.
The Pentagon was particularly concerned about its ability to destroy bunkers
built under
mountains, such as Iran's Fordow site near the Shiite Muslim holy city of
Qom,
according to a former senior U.S. official who is an expert on Iran.
The official said some Pentagon war planners believe conventional bombs
won't be
effective against Fordow and that a tactical nuclear weapon may be
the only military option
if the goal is to destroy the facility. "Once things go into the mountain,
then really you have to have something that
takes the mountain off,"
the official said.
By reducing interest rates
paid for dollar swaps, central bankers
are in effect increasing the quantity of global dollars in circulation.
The result? The dollar will weaken, inflation will rise, and gold will soar.
The Commodity Futures
Trading Commission (CFTC) voted to move the effective date
for rules that would add oversight to the
$600 trillion derivatives market to July of 2012.
Derivatives were one of the primary culprits in creating the financial
crisis in 2008.
Originally the regulations were to go into effect on July 16 of this year,
but the CFTC pushed the date back to Dec. 31. And now, regulations of the
item
most responsible for the 2008 meltdown won't go into effect until two years
after Dodd-Frank was enacted and nearly four years after the crisis
occurred.
Jobless benefits: a two-month extension of a payroll tax holiday
for 160 million workers, continue unemployment benefits for millions more
and maintain Medicare reimbursement fees for doctors —
“the only viable way to prevent a tax hike, on Jan. 1. The only one.”
“The clock is ticking; time is running out,” Mr. Obama said.
“And if the House Republicans refuse to vote for the Senate bill,
or even allow it to come up for a vote, taxes will go up in 11 days.”
Republicans in House Reject
Deal Extending Payroll Tax Cut,
By Jennifer Steinhauer, NY Times,
December 20, 2011
---------------------------
Thanks to Bloomberg LP and
Fox News Networks LLC - who sued the Fed
to get them to cough up data under the Freedom of Information Act - we know just how much they all lied.
Occupy Wall Street, Consider
This My Gift to You
By Shah Gilani, Wall Street Insights & Indictments,
December 22, 2011
By using deficit spending to finance the
budget, taxpayers get the impression
that there's no cost to overspending (recall Greece). But the bill will come
due.
If the tax base grows more slowly (Sic!) than the federal and
state debt,
too much accumulated debt "leads to depreciation and deleveraging, which
leads to
lower demand, lower production, fewer jobs and a lower tax base" (Shah
Gilani).
“Beyond the coming decade, the fiscal outlook is
even more worrisome,”
the Congressional Budget Office said in its report. “Although long-term
budget projections are highly uncertain, the aging of the population and
rising costs for health care would almost certainly push federal spending
up sharply relative to GDP after 2022 if current laws remained in effect.
Federal revenues also would continue to increase relative to GDP under
current law, reaching significantly higher percentages of GDP than at
any time in the nation’s history.”
For the current year, fiscal 2012, the CBO said the budget deficit will
reach $1.1 trillion — down slightly from the past three record years, but
still higher than any other president has ever recorded.
Among the other worrisome signs is that Social Security’s disability
insurance trust fund and Medicare’s hospital insurance trust fund will
be exhausted sometime during the next decade.
The CBO said the Troubled Asset Relief Program, or TARP, which had been
a net positive for the government in 2010 and 2011, will become a net drag.
The report said TARP costs will rise to $23 billion this year.
Watchdogs hoped the gloomy news would break a years-long deadlock that has
given Democrats higher spending and Republicans lower tax rates, with sharp
consequences for the budget.
But there was little sign Tuesday that either side was prepared to relent.
I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world--no longer a government of free opinion, no longer a government by conviction and vote of the majority, but a government by the opinion and duress of small groups of dominant men.
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Unlike many predictions for the collapse of U.S. dollar, this one has timeline and deadline: not later than 31 August 2011. Forty years after Richard Nixon abolished the gold standard on August 15, 1971, the U.S. currency is worn out. It should be devaluated by at least 20 per cent, while investors move to the emerging dim sum bond market. Any procrastination with the devaluation of U.S. dollar will inflict even more damage to both the world economy and the U.S. economy, and will hamper the smooth embedding of the devaluated dollar into the new world's reserve currency.
According to
IMF, the US had outlined "less than half of the tax increases
and spending cuts necessary to bring its public debt down in the
medium term." If the austerity measures are postponed until
2013, the problems which had to be resolved not later
than 31 August 2011 will become
insurmountable, and the only way out will be a drastic devaluation
of US currency -- overnight.
As Sir Winston Churchill put it, America invariably does the right thing, after having exhausted every other alternative.
We have a humongous health-care problem
By Alan S. Blinder, former vice chairman of the Federal Reserve
WSJ,
January 19, 2012
Strange as it may seem with
trillion-dollar-plus deficits, the U.S. government doesn't have
a short-run borrowing problem at all. On the contrary, investors all
over the world are clamoring to lend us money at negative real
interest rates. In purchasing-power terms, they are paying
the U.S. government to borrow their money!
........
A humongous
health-care problem: The CBO projects federal spending on all
purposes other than health care and interest to be roughly
stable as a share of GDP from 2015 to 2035, and then to drift
lower.
-------------------------
Subject:
A humongous health-care problem.
Date: Fri, 20 Jan 2012 19:29:22 +0200
Message-ID:
<CAM7EkxmrtUQgE57-bmTkxQy5zuJ0_TuM1DqX4xEackEwfoyGaQ@mail.gmail.com>
From: Dimi Chakalov <dchakalov@gmail.com>
To:
Alan S Blinder <blinder@princeton.edu>
Cc: John B Taylor <JohnBTaylor@stanford.edu>,
Kenneth Rogoff <krogoff@harvard.edu>,
Laurence J Kotlikoff <kotlikoff@gmail.com>,
Robert Shiller <robert.shiller@yale.edu>,
Jeremy Siegel <siegel@wharton.upenn.edu>,
Carol Osler <cosler@brandeis.edu>,
Barry Eichengreen <eichengr@econ.berkeley.edu>
Do you really believe that investors all
over the world will keep "paying the U.S. government to borrow
their money" at least until 2015, so that "it would be smart to
borrow, say, another $500 billion this year and then pay for it,
say, 10 times over, with $5 trillion in deficit reduction spread
over 10 years—starting, say, in 2014" ?
In recent times, the Chinese have
dramatically decreased their holdings U.S. Treasury bills, which are
short-term debt instruments that mature in one year or less. Chinese
ownership of T-bills peaked at $210.407 billion at the end of May
2009 and dropped to $2.336 billion by the end of November 2011.
That represents a 99 percent (98.88)
decline in Chinese ownership of T-bills.
....
The total U.S. government debt, including both debt held by the
public and intra-governmental debt, was $15.11049 trillion at the
end of November. As of the close of business on Jan. 18, it stood at
$15.23627 trillion.
-------------------------
For the first time
since the Great Depression, households are receiving
more income from
the government than they are paying the
government in taxes.
According to MSN
Money survey in 2011:
* About 43% of American families spend more than they earn each
year.
* Average households carry some $8,000 in credit card debt.
* Personal bankruptcies have doubled in the past decade.
Currently, some 48
percent of all Americans —
146.4 million — are considered by the Census Bureau either as
“low-income” or living in poverty, up 4 million from when Mr. Obama
took office; 57 percent of all children in America now live in such
homes.
-------------------------
Little Alarm Shown at Fed At Dawn of Housing Bust
By Jon Hilsenrath et al., WSJ,
January 13, 2012
In his second meeting as chairman of the Federal Reserve in May
2006, Ben Bernanke heard a Fed governor warn about the nation's
mortgage market. But Mr. Bernanke described the cooling of the
housing boom as a "healthy thing."
"So far we are seeing, at worst, an orderly decline in the housing
market," he said.
Mr. Bernanke's words were contained in 1,197 pages of transcripts
released
Thursday of closed-door Fed meetings from that year. The
transcripts paint the most detailed picture yet of how top officials
at the central bank didn't anticipate the storm about to hit the
U.S. economy and the global financial system.
“Gold is keying off of
the dollar and technicals more than anything else,” Tom Essaye.
-------------------------
QE3, $2,200 Gold, and the Trillion Dollar Bazooka
By Peter Krauth, Money Morning,
January 20, 2012
Now, even Standard Chartered bank's analysts expect gold to climb to
$5,000.
According to a recent article by Al Field posted at www.24hgold.com,
if just 10% of euro interest rate derivatives produce losses,
it could cost the world banking system $22 trillion. That is enough
to effectively bankrupt it.
This is one black swan that could well make a crash landing... and
soon.
In fact, none of the fundamentals supporting gold have gone away.
Instead, they've only become even more entrenched.
So if you don't own gold yet, what exactly are you waiting for?
-------------------------
Gary Shilling,
June 23, 2011: More than three years after the peak, we’re still
not back to where we were. A brand new, cyclical recession
begins in 2012.
Meanwhile Shilling
returns to familiar ground with his prediction that U.S. housing
prices will fall
20% more in 2012. (They’ve already lost a third of their value
from their peak.) The reason? “Foreclosures have been minimal the
last two years because they were held off” by government
loan-modification programs and the scandal over robo-signing.
But now “foreclosures
are likely to come back, and that’s the next leg down,” he says.
========================
While Americans shopped, the Constitution was
shredded
"Negligent dereliction": The killing of 24 civilians, including
women and children
Marine's Plea Ends Iraq Massacre Case
By Julian E. Barnes, WSJ,
January 24, 2012
A Marine Corps staff sergeant charged with manslaughter and assault
for his role in a 2005 massacre of Iraqi civilians has pleaded
guilty to the lesser offense of negligent dereliction of duty,
military officials said Monday.
The plea deal, which results in manslaughter charges being
dropped, brings to a close a lengthy series of high-profile
investigations and court proceedings stemming from the deaths of 24
civilians, including women and children, in Haditha, Iraq.
Staff Sgt. Frank G. Wuterich, 31, had been charged with voluntary
manslaughter, aggravated assault, negligent dereliction of duty and
other charges. He entered the plea to one count of negligent
dereliction on Monday during his trial in a court-martial proceeding
at Camp Pendleton, Calif.
A military judge, Lt. Col. David Jones, is expected to rule Tuesday
on Sgt. Wuterich's sentence. He faces up to three months in prison,
a reduction in rank and a forfeiture of pay. He had faced up to life
in prison under the more serious charges.
Human-rights advocates have watched the proceedings with dismay, and
some in the military have privately expressed disappointment. The
military didn't begin a major inquiry until after an article on the
incident appeared in Time magazine in March 2006. Neal Puckett,
attorney for Sgt. Wuterich, didn't return calls seeking comment, but
told the North County Times of Escondido, Calif., that the deal exonerates Sgt. Wuterich of homicide charges.
.........
Sgt. Wuterich admitted that he was negligent in giving the verbal
order "to shoot first and ask questions later," resulting in his
squad's failure to identify targets.
.........
Seven other Marines had faced charges tied to the massacre. One was
acquitted and charges against the six others eventually were
dismissed.
-----------------------------
At U.S. Base, Afghan Endgame Begins
By Maria Abi-Habib, WSJ,
December 29, 2011
The fate of U.S.-provided power generators at FOB Sharana
encapsulates U.S. concerns about whether Afghan forces will be able
to hold their ground after the foreigners leave.
The generators often break because the Afghan operators haven't
learned to turn them on properly and keep overloading them, said
engineers of the 172nd brigade. The engineers figured they have
replaced at least 25 generators given to the Afghan forces since
July, at a cost of $400,000 each.
"We've taught them the steps to turn it on, but it hasn't stuck, and
the generators, air conditioners, all of that will break," said
Capt. Mike Merseburg.
"The answer for them has always been, 'Well, give me a new one,' "
said another engineer, Capt. Adrian Sanchez. "But what's the point
if they can't sustain it?"
=====================================
Subject: Global Concerns to Keep Lid on U.S. Rates. By Kelly Evans,
WSJ,
December 29, 2011
Date: Thu, 29 Dec 2011 15:04:48 +0200
From: Dimi Chakalov <dchakalov@gmail.com>
To: Kelly Evans <kelly.evans@wsj.com>
Cc: jon.hilsenrath@wsj.com, dcallaway@marketwatch.com
Hello Ms. Evans,
I left a comment (cf. attached). Once the economy picks up, these
fake money will NOT increase the inflation-adjusted after-tax
incomes per person (Jon Hilsenrath, What Is Money and How Do You
Destroy It? WSJ,
December 28, 2011).
In 2011, "when large institutional investors truly get scared, they
buy U.S. dollars" (David
Callaway). When large institutional investors notice the impact
from those $29 TRILLION, they will dump
U.S. dollars, and the safe-haven Treasury bubble will burst.
Pity you won't take notice, as usual.
Sincerely,
Dimi Chakalov
-------------
Note: How much
is $29.616 trillion ? Roughly $94.690 per person (U.S.
population estimated at 312.767.291 people). So, is $23 for a loaf
of bread, as Glenn Beck estimated
last year, unrealistic?
D.C.
December 29, 2011
=================================
$29,000,000,000,000: A Detailed Look at the Fed’s Bailout by
Funding Facility and Recipient, By James Felkerson,
Working Paper No. 698 | December 2011
Bail-out Bombshell: Fed "Emergency" Bank Rescue Totaled $29 Trillion
Over Three Years
By J. Andrew Felkerson, AlterNet,
December 15, 2011
In reality, no less than $29.616 trillion is the total
emergency assistance provided by the Fed to foreign and domestic
entities during the Global Financial Crisis. (...) The results we
have calculated are presented below, and it is important to note
that the totals are cumulative and in billions of U.S. dollars. (The
numbers in parentheses
indicate amounts still outstanding as of November 10, 2011).
I want to be clear. These are the totals of Fed lending and asset
purchases actually undertaken since the bail-out began. There is no
double-counting. And we do not include any credit facilities created
by the Fed unless they were actually used. These figures accurately
reflect the cumulative totals over the approximately three years
actually used by the Fed to prop-up domestic and international
banks, shadow banks, central banks, and even some non-financial
institutions.
------------------
The Wall Street got a
"discount window" of $7.7 trillion at 0.01% interest and
then borrowed the money back at much higher interest. Watch
Jon Stewart.
Imagine
Ben Bernanke going on national TV and saying the following:
“I would like to inform the American people that we are bankrupt. We
have been hoping to maintain confidence in our system by
artificially suppressing rates by buying up bonds with money we
printed from nothing. We hope that by keeping rates low, we can
create another illusory speculative boom and kick the debt can down
the road for another administration to take the blame for. I have no
clue what I’m doing - after all, I’m the one who thought subprime
was “contained.”"
Impossible? Just do
the math, and read Adrian Salbuchi,
19 December 2011:
"Exactly ten years ago Argentina suffered a full-scale financial and
governmental collapse. (...) Clearly, this was a massive
banker-orchestrated, government-backed robbery of the assets and
savings of 40 million Argentineans. Half our population quickly fell
below the poverty line, GDP contracted by almost 40% in 2002,
millions lost their jobs, their savings, their homes to
foreclosures, their livelihoods and yet… not one single bank folded
or collapsed!"
One can avoid the
collapse of U.S. banks only by devaluating the greenback
overnight, as it happened in the U.K. on the
morning of November 19, 1967.
D. Chakalov
December 19, 2011
==========================
Subject: Euro rescue
remains on crumbling foundations, by David Smith
Date: Sun, 11 Dec 2011 20:31:56 +0000
From: Dimi Chakalov <dchakalov@gmail.com>
To: david.smith@sunday-times.co.uk
Cc: gerard.lyons@sc.com,
rbarro@harvard.edu,
tony.atkinson@nuffield.ox.ac.uk,
t.besley@lse.ac.uk,
torsten.persson@iies.su.se,
fmg@lse.ac.uk
There is one crucial difference between the Eurozone and the U.S.,
which, to the best of my knowledge, neither you nor any of your
colleagues have acknowledged: it cannot be proven that the Eurozone
will crash nor that it will survive, while it has already been
proven, back in 1960 by Robert Triffin, that the U.S. economy will
crash.
My prediction regarding the outcome from the Triffin Dilemma is
posted at
U.S. will have to devaluate its currency *overnight*, as it happened
in the U.K. on the morning of November 19, 1967. Meanwhile China
will keep undermining the dollar not only "by the back-door" (cf.
Gerard Lyons, FT,
27 April 2010), but by intervention on the gold market as well.
Should you or any of your colleagues can suggest a different
scenario, please do write me back.
In its January issue, Bloomberg Markets
magazine
reveals that - at the March 9, 2009 nadir of the financial
crisis - the U.S. Federal Reserve had committed $7.77 trillion to
rescuing the American financial system. That total was more than
half the value of all that was produced in the U.S. economy for that
entire year.
While this was going on however, it was a deep, dark secret. The Fed
never let on, for instance, that American banks were in such deep
trouble that they required a combined $1.2 trillion on Dec. 8, 2008
- "their neediest day," Bloomberg said.
But here's the best part: Many of the biggest banks have ended up
doing great as a result of the central bank's largesse.
Here's why: Because these "emergency" Fed loans gave banks access to
ultra-low (well-below-market) interest rates between August 2007 and
April 2010, banks worldwide were able to earn an estimated $13
billion.
...........
What follows is a
"power ranking" of the 20 banks that saw their outstanding
loans peak at more than $25 billion - and some insight on how this
Fed lending enabled Wall Street to profit, even as Main Street
suffered.
=============================
Goldman Says 2012 Is the New 2008
By James Herron, WSJ,
December 2, 2011
Just four years after the Great Recession, Goldman Sachs says we
could be heading for a repeat next year with a different cast of
characters but an equally scary ending.
If Goldman is right, the global economy could suffer another epochal
battering in 2012, with the EU playing the role of the U.S.,
sovereign European default, the new Lehman Brothers and another
damaging oil price spike.
To be sure, there are
similarities, but just because the setup is the same, doesn’t mean
the outcome is pre-determined.
............
Comment: The outcome
cannot be the same, simply because this time there are too much
fake money already in place, and the gold price will literally
explode.
The
deadline estimated with René Thom's theory of catastrophes was
missed.
Update:
After creating $16 trillion out of thin air, the
U.S. economy has finally hit 'stall
speed'. At the
current rate of creating jobs, full employment is
12 years away. The latest Census data raised the number of poor
to
49 million (the poverty rate for the elderly jumped to 15.9%),
and the
consumer confidence is now back to levels during the 2008-2009 recession.
It is a vicious self-perpetuating cycle of declining income hence
tax revenue, which cannot be reversed by creating even more U.S.
dollars out of thin air.
Even "Government
Sachs" is reporting loss of revenue. "Right now, nobody knows
what is going to happen tomorrow," said JPMorgan CEO
Jamie Dimon.
The budget deficit is
growing and austerity measures are unavoidable (example:
Greece), but trimming federal spending by $2 trillion is too
little -- U.S. needs to cut $10 trillion
over ten years. However, austerity measures under recession are
counterproductive. The federal funds rate will stay at 0 to 1/4
percent at least through
mid-2013, which will further inhibit the sluggish recovery (if
any). The
Supercommittee is
not working, and the
$1.2 trillion austerity package will be triggered in 2013. The
first shock is expected on February 11, 2012:
2,153,700 jobless people will lose their extended benefits. The rising expenditure for providing retirement and health
benefits to the
aging baby boomers is unknown. Nationwide, states have a
combined $689.5 billion in unfunded pension liabilities and $418
billion in government retiree health care obligations, according to
data collected earlier this year by
The Associated Press. State Medicaid spending will rise 29
percent this year as governors confront an enrollment surge of
unemployed people. “In any given state, literally every dollar of
new revenue that’s coming in is all going to Medicaid,” said
Matt Salo, executive director of the National Association of
Medicaid Directors.
According to the
International Monetary Fund, holders of U.S. mortgage and other
debt lost $2.7 trillion in the financial crisis, some of that
already shifted to taxpayers. American homes are worth nearly $7
trillion less than they were five year ago, a 25% decline. Nearly
23% of Americans with mortgages owe more than
the value of their homes.
As of
November 4, 2011, the 86th and 87th banks to fail in the U.S.
this year are Mid City Bank in Omaha and SunFirst Bank of St.
George, Utah. After over three years of efforts toward regaining
financial stability, Jefferson County, Alabama, filed for
municipal
bankruptcy, the largest in U.S. history ($3.136
billion).
Russians will complete their purchase of 100 metric tons of gold
before the end of 2011. As Eurozone heads for
long
recession,
the only advantage the U.S. has is its ability to
devalue the
dollar by 20% -- overnight -- and prepare for the
new world’s reserve currency, as suggested by the
International Monetary Fund.
There is no way to
resolve the Triffin Dilemma: as the marginal
supplier of the current world’s reserve currency, the United States
has no choice but to run persistent, and
increasing, federal budget deficits.
In the first 6 months
of 2011, the total outstanding notional of all derivatives rose from
$601 trillion at December 31, 2010 to
$708 trillion at June 30, 2011 -- a $107 trillion increase in
half a year. The total value of all gold ever mined in the whole
world, estimated by the end of 2009, was
165,000 tones: barely $10 trillion (app. $1900 per ounce x
32,000 x 165,000).
President Hu Jintao (November
12, 2011): "The trade deficit and unemployment problems are not
caused by the yuan exchange rate. Even a major appreciation of the
yuan would not resolve the problems facing the United States."
Exerpt from Chinese news media sources (April
28, 2009): “The U.S. and Europe have always suppressed the
rising price of gold. They intend to weaken gold’s function as an
international reserve currency. They don’t want to see other
countries turning to gold reserves instead of the U.S. dollar or
Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in
maintaining the U.S. dollar’s role as the international reserve
currency. China’s increased gold reserves will thus act as a model
and lead other countries towards reserving more gold. Large gold
reserves are also beneficial in promoting the internationalization
of the RMB.”
Central Banks in
Scramble to Buy Gold
By Rhiannon Hoyle, WSJ,
November
17, 2011
Almost 150 tons of gold was bought by unidentified "central banks"
in the third quarter—almost seven times as much as in the
year-earlier period. According to the World
Gold Council, China has just 1.7% of its total foreign reserves
in gold, compared to Germany’s 73%.
Comment: To make Yuan
fully convertible by
2015,
China will have to back up its currency by
accumulating... how much gold ? If you know the answer to this
question, you could predict the moment at which
China will dump its
US Treasury securities. Well, perhaps not until
2013.
Some of the automatic
cuts, which will kick in starting
January 2013, are:
* A $492 billion cut over 10 years from
defense, which comes to
about 10% of the military’s budget in the first year.
* A cut of 7.8% in domestic programs
* A 2% cut in Medicare. Under the debt limit deal, cuts to this
program were limited to 2%, and they cannot come from payments to
beneficiaries.
* Social Security, Medicaid, and some other programs for the
disadvantaged were protected under the deal from any cuts, which
will sharply increase the deficit.
Meanwhile
Occupy Wall Street will blossom everywhere, gold will be
over $5000 an ounce, and nobody would even think about some 'major
appreciation of the yuan'.
Even more dangerous
scenario is with a war on Iran: an enormous
number of people will be killed, all democracy movements in Iran
will be wiped out, and the 2009 plan for replacing the US dollar
"within
nine years" (that is, by 2018) will be implemented.
Which means currency
wars everywhere. It will be too late to introduce the Thaler.
D. Chakalov
November 28, 2011
James G.
Rickards, November 10, 2011: "People will go to gold, not because they want to, but because they have to."
==========================================
On Liquidity Traps and
Quantitative Easing
By Edward Harrison,
25 October 2010
Buying treasuries with newly printed money when rates are at zero
percent is an asset swap, nothing more. The US is in a
liquidity trap. The only way out is through
fiscal policy or a liquidation of excess capacity.
“You had a financial crisis where the market did actually collapse,
but it was kept alive by the authorities. People don’t realize that
the system has actually
collapsed.”
Debt Collapse -
$20,000 Gold
Mike Maloney On Gold, Silver & Economics
========================================
You cannot push on a
string
By Irwin Kellner, MarketWatch,
November 8, 2011
The central bank’s tools are limited. It can cut interest rates,
boost the money supply and change reserve (and margin) requirements.
However, it can’t force people to borrow or to buy stocks, and low
interest rates can actually hurt the economy by
depriving savers of interest income.
Today is a good example. Low rates and lots of liquidity have done
little to prop up economic growth and thus reduce joblessness.
Businesses don’t want to borrow, the banks are reluctant to lend,
and consumers are trying to reduce their debts and increase their
savings.
As Mr. Bernanke told the press: “It would be helpful if we could get
assistance from other parts of the government to help create more
jobs.” Translation: Fiscal policy is needed to boost growth and
lower the unemployment rate.
The government should spend more and tax less. It should not worry
about the deficit, that’s for
another day.
-------
Alan Grayson (October
7, 2011): "If I am the spokesman for the 24 million people in
this country who can't find a full time job, that we should not have
50 million people in this country who cannot afford to see a doctor
when they're sick, we shouldn't have 47 million people who need
government help in order to feed themselves and we shouldn't have 15
million families who owe more on their mortgage than the value of
their homes - OK, I'll be that spokesman."
And now, in response
to the Panic of 2008–09, we are implementing the Dodd–Frank Act.
Dodd–Frank―which is over 2,000 pages long, contains 16 titles, 38
subtitles and a total of 541 sections―is the most complex
document ever written in the history of efforts to change the
financial regulatory landscape. (...)
Will it work? Will Dodd–Frank achieve the desired goals declared
in its preamble? The devil, as always, is in the details of
how the legislation is implemented.
........
The head of one of the major U.S. financial institutions has called
these new proposals “anti-American.”[19]
Last Thursday, the Wall Street Journal wrote of “bankers seething
over rising … capital requirements.”[20]
Such is the intensity of emotion to resist the work of the Fed and
other regulators as they seek to protect the system from the
pernicious risk inherent in the existence of megabanks.
Summary: Looking at my "crystal ball", I see a massive knee-jerk selling of U.S. Treasurys securities right after the loss of confidence in U.S. debt. Currently, such move is considered "unthinkable": there is a common belief that foreign investors will not dump Treasury securities. For if they do it, where would they reinvest the money? To see how ridiculous this 'common belief' is, consider the simple rule that nobody would rush to invest in a "safe heaven" under recession, given the prospect for this "safe heaven" to be hit much harder in the nearest future. Last year, the same "experts" advocating this 'common belief' projected 4.2 per cent annualized GDP growth for 2011, while it came out three times lower (cf. Peter Schiff, July 30, 2011, 07:32- 08:07). Just one year ago, nobody was expecting the U.S. economy to slide into recession. It was unthinkable.
Likewise, nobody can envisage today the two options explained by Mohamed El-Erian above: it's just "unthinkable". But after flooding the economy with $16 trillion (details below), the "unthinkable" became inevitable.
The "safe heaven" of U.S. Treasurys depends on top secret negotiations. If people perceive the dollar trap as a racket, the “exorbitant privilege” of the dollar will become their main obstacle toward financial stability. Nobody can impose rules on the global economy by assuming the status of 'too big to fail'. The foreign investors will calculate how much they will lose by holding U.S. Treasurys securities and obeying the 'the dollar trap' rule, and will prepare for the "unthinkable".
Think of a stressed dog, after Wiki: at higher stress levels, it will remain cowed (China currently "can't do anything" but to keep locked to 'the tallest midget'). But as the dog is irritated more and more, it will reach the bifurcation point (F&%$it!), when it will suddenly, discontinuously snap through to angry mode. Then the 'unthinkable' will become inevitable.
Wirtschaftsminister und Vizekanzler Philipp Rösler,
11.09.2011:
"Um den Euro zu stabilisieren, darf es auch
kurzfristig keine Denkverbote
mehr geben."
Subject:
The ZEW Index
Date: Thu, 20 Oct 2011 17:39:42 +0300
Message-ID:
<CAM7Ekxn1zOCQ32is9qfoGZMyotyUzUjBYyKk5+O=J5Psx1PbAg@mail.gmail.com>
From: Dimi Chakalov <dchakalov@gmail.com>
To: Michael Schröder <schroeder@zew.de>
Cc: tykvova@zew.de, info@zew.de,
backes-gellner@business.uzh.ch,
margit.feher@dowjones.com,
rnutting@marketwatch.com,
info@newpolitics.net
Dear Dr. Schröder,
I learned from WSJ [Ref. 1] that you've surveyed 271 analysts and
institutional investors. May I share with you my concerns, which, to
the best of my knowledge, are supported by many economists, but have
not been recognized publicly. Will be happy to provide detailed
information on the issues raised below.
It is crucially important to evaluate (i) the systemic risk for
major crash of US economy after the Triffin Dilemma, and (ii) its
impact on the global financial system and the Eurozone. Yet
regarding (ii), we don't know even the current state of Credit
Default Swaps held by EU banks, as acknowledged by Robert Shapiro
(03:13 - 03:35, October 5, 2011),
Regarding (i), it is
gradually becoming obvious that the
US economy cannot grow under the
current debt overhang and artificially low interest rates [Ref. 2].
My grave concerns are that if they unleash the beast out of the
(inflation) bottle, to stimulate the economy and reduce the
unemployment, the end result will be runaway inflation: $16 trillion
were created out of 'thin air',
In the case of US, it
may be 20% -- or more -- devaluation of USD,
overnight.
Unlike
Greece, they can still postpone the crash by just printing
USD and hoping that international investors will, faute de mieux,
stick to "the tallest midget",
I want to send an open letter to Mr. Bernanke and President Obama:
Dear Sirs: You seem to think that the only way to create jobs is to
allow people to borrow money at near zero percent. As if the only
spending that goes on is done by means of debt. Not so. What your
policies have done is take money out of the pockets of responsible
life-long savers and hand it over to already-wealthy bankers and
irresponsible borrowers. Those of us who 'saved up' before spending,
(isn't that a quaint idea,) whether on houses, televisions,
restaurant meals, new cars, vacations, etc., etc., have seen our CD
interest rates plummet. (And, no, we did not, and do not, have money
in the stock market. Thank God. We need to sleep at night.) We no
longer have that extra bit of cash to spend so as to stimulate the
economy in a 'retail' way. Restaurants won't be hiring until
seniors, and others who used to count on interest income, once again
have that extra. This holiday season will not see us spreading cheer
by spending on gifts. The post office will see no Christmas cards
mailed by us. We will visit the mall only in order to exercise by
walking.
Here is a list of the things my husband and I have deferred buying,
and refuse to go into debt to buy, because of the cut to our CD
interest: a car more expensive than our old Corolla, a flat screen
television, any cable television programming beyond basic, any
hand-held device (any i-anything,) a camera to replace the one lost,
new clothes (except what we can buy at Costco for less than $30,
name-brand anything if house brand is cheaper, anything else not on
sale for at least 20% off, eating out in any restaurant at all
unless away from home. Our thermostat is set for 58 degrees. We
haven't been to a movie in more than three years. I am wearing out
clothes too shabby to donate to Good Will.
Mr. Bernanke, President Obama, this is not how we expected to be
treated by our government. "Printing Press" money is
government-sponsored thieving from its citizens. Your policies have
made our years of saving useless (unless we spend down capital.) You
have enriched the already wealthy at our expense. And, in the
bargain, you have made it impossible for us to help put
America back to work.
Because you have taken from us what we would have spent to stimulate
the economy.
----------
According to the Federal Reserve, the low interest rates that result
from QE are supposed to entice consumers to borrow and spend and to
prod businesses into investing in plants, equipment and inventory.
These temptingly lower interest rates will lower the total cost of
expenditure for both consumers and businesses and the resulting
increase in economic activity will result in lower unemployment.
It is estimated that
the total loss in consumption as a result of our current abnormally
low interest rates environment is $371 billion which equates to 2.53
percentage points of GDP or 3.5 million jobs.
------------
The Downside of
Monetary Easing, by William F. Ford and Polina Vlasenko, American
Institute for Economic Research, Vol. LXXVIII, No. 12, July 4,
2011 (RR20110704-rr.pdf)
------------
State Medicaid spending will rise 29 percent this year as
governors confront an enrollment surge of unemployed people. “In any
given state, literally every dollar of new revenue that’s coming in
is all going to Medicaid,” said Matt Salo, executive director of the
National Association of Medicaid Directors (source
here).
------------
Many Americans' credit scores have fallen because they were late in
paying bills during the recession. That makes it hard for them to
get a mortgage, but that's only part of the story. Lenders are
demanding ever-higher credit scores. Having a good credit history
isn't sufficient; one has to have a really good one to get a prime
loan. "Roughly about the bottom third of people who might have
qualified for a prime mortgage...a few years ago, cannot qualify
today," Fed Chairman Ben Bernanke said, with disapproval, a few
months ago.
.......
The bulk of mortgages made today are sold to or guaranteed by
government entities Fannie Mae, Freddie Mac and the
Federal Housing Administration. They bear the risk that the loan
won't be paid back. All three took huge hits, and are trying to
reduce losses by forcing lenders, originators and middlemen to take
back loans that shouldn't have been made—because the borrower lied,
the appraisal was inflated, the paperwork was irresponsibly sloppy.
After all, why should taxpayers pay for sins
of those who
recklessly made bad loans?
We have already
gold trading in yuan, and there is no ambiguity
whatsoever about 'where are you gonna go' next year. It's a matter
of simple math, as shown by Robert Triffin well before you were
born.
Sincerely,
Dimi Chakalov
--------------
Keith Fitz-Gerald (The Money Map
Report, October 2011): To simply keep pace with this real-money
inflation of the number of dollars since the bottom of The Crash,
the Dow would have to be sitting at 36,243
right now!
------------
The Day the U.S.
Treasury Rejected My Advice – And Doomed America
By Martin Hutchinson, Money Morning,
October 18, 2011
The conclusion is inescapable. When interest rates rise - and I very
much doubt U.S. Federal Reserve Chairman Ben Bernanke will be able
to hold them flat until 2013 - the deficit increases from the
Treasury's refinancing will dwarf any feeble attempts by Congress to
tame the country's debt.
That means the current $1.5 trillion deficits will quickly rise to
$2.5 trillion, and the debt levels will spiral out of control.
------------
Winnie the Pooh (Pooh's
Little Instruction Book): People who
don't Think probably don't
have Brains; rather, they have gray fluff that's blown into their
heads by mistake.
=========================================
How long will Peter
Schiff be wrong on the bond crash ?
Subject: When will the
bond bubble burst ?
Date: Wed, 19 Oct 2011 23:43:23 +0300
Message-ID:
<CAM7EkxnRvuZNy0TCSkg=LDgrrRqpPUzDig63F8nTyKL8ZK9x4g@mail.gmail.com>
From: Dimi Chakalov <dchakalov@gmail.com>
To: Carmen M Reinhart <creinhar@umd.edu>,
Xavier Gabaix <xgabaix@stern.nyu.edu>,
Jeremy Siegel <siegel@wharton.upenn.edu>,
Robert Shiller <robert.shiller@yale.edu>,
John B Taylor <JohnBTaylor@stanford.edu>,
Laurence J Kotlikoff <kotlikoff@gmail.com>,
Kenneth Rogoff <krogoff@harvard.edu>,
Barry Eichengreen <eichengr@econ.berkeley.edu>,
Carol Osler <cosler@brandeis.edu>,
Alan S Blinder <blinder@princeton.edu>,
etfs@pimco.com,
pbrimelow@marketwatch.com,
pkrugman@princeton.edu
Dear colleagues,
May I ask for your opinion on the question in the subject line,
given the $16 trillion created from 'thin air' by the Fed,
Would you endorse the advice from Bill Gross?
On June 8th this year, at the 2011 Morningstar Investment Conference
in Chicago, he suggested: "You must get out of the United States ...
10, 20, 30 years from now."
The Fed has held short-term interest rates at zero for nearly three
years, has purchased $2.3 trillion in long-term securities, and has
pushed long-term interest rates even lower (David Wessel, WSJ,
October 13, 2011).
As long as we have
China to dump out inflation on the peasants.. we were
ok...although we lost our manufacturing base in the meantime...but
the good times are a ending.. those peasants want to start to live
at their means not below so Americans can fight wars, buy McMansions,
have a huge entitlement class and so on.... eventually you run
out of other people willing to pay for your freebies.
Problem with pumping money without first having the actual increase
in productivity is you distort the preference between savings and
investment.. which then creates clusters of errors mostly in long
term asset investments...in other words a bubble.. the best thing to
do in these cases is stop subsidizing the sectors choking on too
much debt and let the free market work...all this central planning
is a joke.. and just prolongs the agony.. Wessel doesn't get
this...he really has no idea on how economies grow.. and it sure
isn't because people like Bernanke steal from savers to bail out
politically connected sectors like Wall Street and Govt.
-----------------
Inside the Fed Fight Over Bond Buys
By Luca Di Leo and Jon Hilsenrath, WSJ,
October 13, 2011
Some officials want the Fed to say how much inflation would
need to rise or how much unemployment would need to fall to
spur the central bank to raise interest rates. Although they
took no action, the minutes showed they held out the possibility of
providing more guidance on this front when they release their
quarterly economic projections. The next batch is due in November.
The Treasury sold $32 billion in 3-year notes on Monday at the lowest yield ever.
30-year mortgage below 4% for the first time
By Ruth Mantell, MarketWatch, October
6, 2011
30-year mortgage
below 4% for the first time. The average rate on the 15-year fixed-rate mortgage also hit a record low in the most recent week, ticking down to 3.26% from 3.28% in the prior week. These data go back to 1991.
==================================
Keith Fitz-Gerald, The Money Map
Report,
October 2011
The U.S. monetary base has been expanded from around $850 billion or
so in early 2009 (at the beginning of the “recovery”) to just over
$2.7 trillion in 2011.
That’s an increase of more than 217% in just 2½ years.
Here’s what that means, in real-money terms: Every dollar that’s in
your wallet, your bank account, your IRA, and everything else you’re
holding right now is actually worth less than one third as
much as it was in March of ‘09 by the purest measure of inflation –
the amount of money in circulation.
Let me put this in perspective for you: To simply keep pace with
this real-money inflation of the number of dollars since the bottom
of The Crash, the Dow would have to be sitting at 36,243
right now!
.......
You see, a weakening dollar makes U.S. exports more desirable
abroad, boosts home prices in nominal terms, and reduces the
magnitude of our foreign debt obligations. It also artificially
balloons the stock market in nominal terms.
If we follow the exact same inflationary trajectory we’ve seen in
America for the last 2½ years, the relative, real-money value of $1
million today would be only $99,513 five years from now.
........
And the reason gold has more than doubled in 2½ years is because the
U.S. dollar’s power has been more or less cut in half by
inflation.
The post-WW II system was riddled with a fundamental dilemma, known as Triffen’s Dilemma: on the one hand, the U.S. has had to print more dollars and run a balance-of-payments deficit to satisfy that growing global demand for liquidity as the de facto reserve currency; on the other hand, the continued balance of payments deficits threatens the credibility of the U.S. dollar as a sound reserve currency. (...)
But confidence in the currency and the safety of U.S. government debt is undermined by a $12.3 trillion national debt, trillion dollar budget deficits, unfunded obligations for programs such as Social Security, Medicare and Medicaid, the threat of a federal government shutdown and the possibility of default. Eichengreen emphasizes, “…as the burden of debt service grows heavier, questions will be asked about whether the U.S. intends to maintain the value of its debts or might resort to inflating them away. Foreign investors will be reluctant to put all their eggs in the dollar basket.”
The downgrade to the U.S.'s AAA rating is feared to cause negative effects. Interest rates in the U.S. could rise, although they initially have not. The U.S. government would have to pay more to borrow since there would no longer be as big an appetite for U.S. Treasury securities on the part of foreign central banks and institutional investors. The rise in borrowing costs would exacerbate the debt problem and could put a damper on credit creation and growth in the U.S. By some estimates, the international trade dynamics could cause U.S. living standards to be reduced by as much as 1.5 percent of GDP.
Historically, international exchange has been based upon the use of currencies of dominant creditor countries.
It is seemingly unsustainable for the international monetary system to be dominated by debtor nations, and especially by the world's largest debtor (you can't pay back your debt with more debt; cf. Richard Bove -- D.C.).
What about other currency alternatives? Neither the European euro nor Chinese yuan fit the needs of a global reserve currency.
==============================
Governments don't have to default, they can inflate By Steven R. Cunningham, AIER, August 11, 2011
If we assume that U.S. debt ceilings will ultimately be raised each time, then the current downgrade amounts to a forecast of inflation by the rating agency. Basically, S&P always assumes stable economic conditions, including a low, fixed inflation rate. This would rule out the central bank endlessly creating money to finance deficits.
Under that theoretical constraint, the U.S. could default.
==========================================
Subject: Correlations, Correlations Everywhere, by Alen Mattich Date: Mon, 12 Sep 2011 12:51:33 +0300 Message-ID: <CAM7EkxnFMTYmHf93MyewaJodSDWOBmP8boEWFZOwbvipLtryMA@mail.gmail.com> From: Dimi Chakalov <dchakalov@gmail.com> To: Alen Mattich <alen.mattich@dowjones.com>, rsylla@stern.nyu.edu, rsmith@stern.nyu.edu, brett.arends@wsj.com, charles.forelle@wsj.com Cc: Lars E O Svensson <lars.svensson@riksbank.se>, David Wessel <capital@wsj.com>, Kenneth Rogoff <krogoff@harvard.edu>, Martin Feldstein <msfeldst@nber.org>, Jeremy Siegel <siegel@wharton.upenn.edu>, Robert Shiller <robert.shiller@yale.edu>, John B Taylor <JohnBTaylor@stanford.edu>, Laurence J Kotlikoff <kotlikoff@gmail.com>, Jeremy J Nalewaik <jeremy.j.nalewaik@frb.gov>, Diane Vazza <diane_vazza@standardandpoors.com>, Beth Ann Bovino <bethann_bovino@standardandpoors.com>, DU Mingyan <master@dagongcredit.com>, Mu Xuequan <xxp69@xinhuanet.com>, Jon Hilsenrath <Jon.Hilsenrath@wsj.com>, publicaffairs@imf.org, ieo@imf.org, media@imf.org, bfcoffice@worldbank.org
Why the Dollar's Reign Is Near an End
By Barry Eichengreen, WSJ,
March 2, 2011
Finally, there is the danger that the dollar's safe-haven status
will be lost. Foreign investors—private and official alike—hold
dollars not simply because they are liquid but because they are
secure. The U.S. government has a history of honoring its
obligations, and it has always had the fiscal capacity to do so.
But now, mainly as a result of the financial crisis, federal debt is
approaching 75% of U.S. gross domestic product. Trillion-dollar
deficits stretch as far as the eye can see. And as the burden of
debt service grows heavier, questions will be asked about whether the U.S. intends to maintain the value of its
debts or might resort to inflating them away.
Foreign investors will be reluctant to put all their eggs in the
dollar basket. At a minimum, the dollar will have to share its
safe-haven status with other currencies.
.......
American companies will have to cope with some of the same
exchange-rate risks and exposures as their foreign competitors.
Conversely, life will become easier for European and Chinese banks
and companies, which will be able to do more of their international
business in their own currencies. The same will be true of companies
in other countries that do most of their business with China or
Europe. It will be a considerable convenience—and competitive
advantage—for them to be able to do that business in yuan or euros rather than having to go through the
dollar.
......
In this new monetary world, moreover, the U.S. government will
not be able to finance its budget deficits so cheaply, since
there will no longer be as big an appetite for U.S. Treasury
securities on the part of foreign central banks.
Nor will the U.S. be able to run such large trade and
current-account deficits, since financing them will become more
expensive. Narrowing the current-account deficit will require
exporting more, which will mean making U.S. goods more competitive on foreign markets. That in turn means that the dollar
will have to fall on foreign-exchange markets—helping U.S. exporters
and hurting those companies that export to the U.S.
My calculations suggest that the dollar will have to fall by roughly 20%.
Because the prices of imported goods will rise in the U.S., living
standards will be reduced by about 1.5% of GDP—$225 billion in
today's dollars. That is the equivalent to a half-year of normal
economic growth. While this is not an economic disaster, Americans
will definitely feel it in the wallet.
==============================
Get Ready: Here Comes the Yuan
By Tom Orlik, WSJ,
June 2, 2011
A yuan that's more widely used in international trade and investment
could eventually challenge the dollar's supremacy, correct some of
the imbalances that plague the Chinese and global economy, and force
a profligate U.S. to live within its means.
.......
But more substantial opening of the capital account will require
progress in two areas: an exchange rate that is close to fair value
and market-set interest rates. The yuan is still undervalued, but
two factors suggest it's much closer to market value than it used to
be: It has appreciated 20% in real terms against a trade-weighted
basket of currencies since 2005, and China's current-account surplus
fell to 5.2% of gross domestic product in 2010 from 10.1% in 2007.
If the yuan is approaching fair value, the Chinese government will
be able to loosen controls on the capital account with less chance
of triggering destabilizing speculative inflows.
......
Yields on yuan-denominated debt trading in Hong Kong are already set
by the market rather than with reference to the People's Bank of
China's benchmark interest rate.
According to the Royal Bank of Scotland, the value of bonds
outstanding in this so-called dim-sum market has risen to the
equivalent of $15.8 billion from about $5.3 billion at the end of
2009. McDonald's Corp. and Caterpillar Inc. are among the companies
that have turned to the new market for financing.
The increase in trade settlement and the development of Hong Kong as
a yuan financial center are mutually reinforcing. More yuan trade
settlement adds to the pool of liquidity in Hong Kong, encouraging
the development of more yuan investment products, and greater
variety of investment products reinforces the incentive to use the
yuan in trade settlement.
......
Not all of the changes will be so positive for the U.S. Reduced
intervention by China in foreign-exchange markets will lead to a
reduction in demand for U.S. Treasury debt, not just from China but
also from other Asian nations that have followed China's lead in
managing their exchange rates. That will increase the cost of
borrowing for the U.S., making it more difficult to finance public
debt and continued current-account deficits.
The next step in the development of the yuan as an international
currency—a role as a reserve currency held by central banks—will
require more substantial progress. A capital account that still
remains tightly controlled means the Chinese currency can't fulfill
the main function of reserves: a liquid asset that central banks can
use to stabilize the value of their domestic currency.
.......
We aren't there yet. Yuan deposits in Hong Kong aren't yet
equal to 1% of those on the mainland. But the pool of offshore yuan,
available at interest rates set by the market, is growing
fast—reducing the effectiveness of China's capital controls and the
ability of the central bank to use administrative tools to control
the mainland economy.
When the tide of offshore yuan starts to wash over the wall Beijing
has built around its domestic financial system, the impact on the
Chinese and the world economy will be far-reaching. China's closed
capital account has been the defining feature of the world economy
in the past decade; its opening could be the defining feature of the
decade ahead.
========================================
“As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world.”
October 4, 2011,
42:10 - 44:10: Watch the $16-trillion question from Sen.
Bernie Sanders, and the response from Ben Bernanke.
Also from Sen. Bernie
Sanders (Youtube.com link
here):
Senator Sanders: Mr.
Chairman, as you know, there are people demonstrating against Wall
Street in New York city and other cities around the country and I
think the perception on the part of these demonstrators and millions
of other Americans is that as a result of the greed, the
recklessness and the illegal behavior on Wall Street we were plunged
into this horrendous recession we're currently in. Do you agree with
that assessment? Did Wall Street 's greed and recklessness cause
this recession that led to so many people losing their jobs?
Ben Bernanke: It had a... excessive risk taking on Wall Street had a
lot to do with it and so did some failures on the part of
regulators.
Senator Sanders: Do you believe that we have made any significant
progress since the collapse of Wall Street to suggest that we will
not either in the short term or in the longer term once again see a
collapse on Wall Street and the necessity of a bail out?
Ben Bernanke: Senator, yes, we are making substantial progress
although I would point out that many of the rules, implementing, as
you pointed out yourself, many of the rules implementing Dodd-Frank
are not yet enforced or fully implemented but I believe that as this
process goes forward that we will have made a very substantial
improvement, yes.
Senator Sanders: Well I would respectfully disagree.
First Federal Reserve Audit Reveals Trillions in Secret Bailouts By Matthew Cardinale, Inter Press Service, August 28, 2011 http://ipsnews.net/news.asp?idnews=104913
Overall, the greatest borrowing was done by a small number of institutions. Over the three years, Citigroup borrowed a total of 2.5 trillion dollars, Morgan Stanley borrowed two trillion; Merrill Lynch, which was acquired by Bank of America, borrowed 1.9 trillion; and Bank of America borrowed 1.3 trillion. .....
The GAO is currently working on a more detailed report regarding Federal Reserve conflicts of interest, which is due on
Oct. 18, 2011.
----------------
Fed’s $16 Trillion Dollar Secret Slush Fund Props Up Our Way Of Life By Silver Shield, Sons of Liberty Academy, July 25, 2011
Unless more money is created in excess of the debt AND interest accrued the year before, the entire system collapses. If debt/money is created in excess, we reach a point where the exponential growth of compounding interest necessitates larger and larger amounts of debt/money to be created to keep the system from collapsing.
----------------
Comment: Ultimately, the U.S. will have to default. The problems of world's reserve currency stem from its faulty design: check out Robert Triffin. In a nutshell, the U.S. could, at least theoretically, pay back their debt if and only if there was some rule imposing constraints on the volume of money printing; say,
gold standard or Thaler. Then the U.S. would be like a person who can -- theoretically -- pay off his debt, generated with his credit cards, by the end of the month. However, in the case of U.S., such constraints will inevitably impose severe limitations on the volume and liquidity of 'the world's reserve currency': the global economy needs much more, and on 15 August 1971, Richard Nixon decided to let the U.S. dollar go wild. Inevitably, 'money' became 'debt' -- fake money created from thin air.
Inevitably again, the budget deficit can only rise, and the national debt cannot, not even theoretically, be paid off: “we estimate an adjustment between 7 ¾ and 14 ½ percent of every future year’s GDP to restore sustainability and fiscal equity” (IMF Country Report No. 10/248, July 2010, p. 52); details from Richard Bove.
Thus, the U.S. will have to default, simply because they issue 'the world's reserve currency' (Paul Krugman may not be able to understand the Triffin dilemma, but I trust you can).
On the other hand, the U.S. has never,and will never default. What to do, then? Printing more fake money is not an option anymore: the dollar is worn off. It's a natural process, can't go on indefinitely.
The only way to avoid default is to devaluate the dollar overnight.
The sooner, the better.
Here people say -- 'no way, this is absurd!' But what are the remaining alternatives, if any?
Suppose, for the sake of the argument, that the Keynesian experiment with QE1 and QE2 had worked, as in the initial scenario of the Fed. Then just as economic growth begins to appear "strong enough to create jobs rapidly enough to move the nation toward full employment, the Fed’s anti-inflation stance will hit like a bucket of cold water" (J.D. Foster).
Not surprisingly, the Keynesian trick failed and this particular 'bucket of cold water' didn't arrive, yet Fed’s anti-inflation policy still has to be implemented, this time under the unanticipated liquidity trap (check out Richard W. Fisher and the gold price).
A sudden inflation shock cannot be predicted: "We don't know what's going to happen in the next two years" (Alan Blinder). All we know is what will happen after the eagerly anticipated speech of Ben Bernanke in Jackson Hole this coming Friday: no matter what he says, the gold price will jump. Even if he keeps his mouth zipped, the gold will jump anyway. Well, one thing must absolutely be avoided: the U.S. cannot afford two prices for every item in groceries -- one price until 12AM and a second one (certainly higher) after 2PM (as it happened in Bulgaria in 1996). This will lead to enormous social unrest.
Relatively speaking, the lesser evil is to devaluate the greenback now -- overnight. Then follow the suggestion from Alan Greenspan:
“Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggests that inflation will take hold with very deleterious effects on economic activity.”
“At that point, I think we’ll all come to our senses.”
We certainly will come to our senses, all of us, the whole world indeed. But let's not do it the way the debt ceiling was raised, confirming the spell from Churchill: "America invariably does the right thing, after having exhausted every other alternative."
Just take the straightforward and least painful way, for God's sake!
D. Chakalov August 24, 2011
=========================================
Wall Street Protests
By Sen. Bernie Sanders, Huffington Post,
10/7/11 04:02 PM ET
More than three years
ago, Congress rewarded Wall Street with the biggest taxpayer bailout
in the history of the world. Simultaneously but unknown to the
American people at the time, the Federal Reserve provided an even
larger bailout. The details of what the Fed did were kept secret
until a provision in the Dodd-Frank Act that I sponsored required
the Government Accountability Office to audit the Fed's lending
programs during the financial crisis.
As a result of this audit, the American people have learned that the
Federal Reserve provided more than $16
trillion in low-interest loans to every major financial
institution in this country, huge foreign banks, multi-national
corporations, and some of the wealthiest people in the world.
--------
Rachel Maddow reviews the recent history of Wall Street
dishonesty that defrauded investors and ultimately destroyed the
U.S. economy.
Bill Black @ #occupywallstreet on
Arresting Banksters
---------
Martin Hutchinson (Money Morning,
August 11, 2011) argues that a U.S. default may be "a
good thing"; I expect instead a sudden devaluation of USD overnight.
“We demand that
integrity be restored to our elections.
One citizen. One dollar. One vote.
Only citizens should make campaign contributions.
Campaign contributions by citizens should not exceed $1
to any political candidate or party.
Help us reclaim democracy.”
(reported by Paul B. Farrell,
October 18, 2011)
Austerity. If tiny Greece, which accounts for about 2% of the
EU, cannot do this without riots, imagine what will happen when the
reality of sinking pensions, diminished benefits and higher taxes
hits home in the world's primary economies. Nobody will be singing
peacefully around the Occupy Wall Street campfires.
Zbigniew Brzezinski, 03:22 - 03:40,
July 6, 2011: “I don’t want to be a prophet of doom — and I don’t think we are approaching doom — but I think we’re going to slide into intensified social conflicts, social hostility, some forms of radicalism, there is just going to be a sense that this is not a just society.”
Of the 1%, by the 1%, for the 1%
By Joseph E. Stiglitz, Vanity Fair,
May 2011
"The top 1 percent have the best houses, the best educations, the
best doctors, and the best lifestyles, but there is one thing that
money doesn’t seem to have bought: an understanding that their fate
is bound up with how the other 99 percent live. Throughout
history, this is something that the top 1 percent eventually do
learn. Too late."
Catch 22: "Employers are not going to step up hiring unless demand picks up. But consumers are not going to spend more until employment strengthens. There is no help on the way from monetary or fiscal policy, at the federal, state, or local
level" (Kathy
Bostjancic, The Conference Board, October
7, 2011).
Howard Gold,
MarketWatch,
October 14, 2011: "There are 14 million unemployed people in the
U.S.; 9.3 million more are “involuntary” part-time workers. And 2.5
million others were “marginally” attached to the labor force, having
not technically looked for a job for four weeks, according to the
BLS. That’s nearly 26 million people, almost 17% of the labor force.
It’s an “army
of the unemployed” more than ten times the size of the U.S.
military and its reserves. Right now they’re despondent. But if they
ever got angry, they would make Occupy Wall Street look like, well,
a tea party."
Conor Dougherty, WSJ,
October 12, 2011: "The ratio of unemployed people to job
openings is up. There were 4.6 unemployed people for every
job opening in August, up from 4.3 the month earlier, according to
the Labor Department. The ratio – a proxy for how hard it is to find
work – is down from its recession peaks of just shy of 7, but
remains more than twice as high as its pre-recession lows."
Example:
Friendly Ice Cream (established in 1935), which employs app.
10,000 people and operates more than 400 restaurants, filed for
Chapter 11 bankruptcy protection, while the big corporations are
sitting on $2 trillion, waiting for 99-ers to start spending.
Yet Ben Bernanke is "optimistic".
Go figure.
Investigative reporter Ellen Schultz talks about how corporations
deliberately deceived their employees and Congress to profit from
workers' pensions.
"Read it. With a glass of wine." (Jon Stewart)
More than $2 billion in federal funds disbursed this year to spur
small-business lending by community banks was hijacked to
repay bailout funds that the banks received under TARP.
"The Small Business Lending Fund was meant to raise capital at
smaller banks, which tend to lend more heavily to small businesses,
in the hopes of jump-starting growth and employment. But instead of
directly lending to small businesses, many of the banks used the
money to rid themselves of higher-cost TARP debt and tougher
restrictions."
Comment: "We can vote
out our liars, unlike certain Arab — and Asian — countries," writes
Thomas Friedman (The Whole Truth and Nothing But, NY Times,
September 6, 2011). Sounds great, but can you vote out or
discharge those who installed the loopholes in TART rules? Yes you
can, only
you won't.
Thomas Friedman ('The
Whole Truth and Nothing But'): "We used the cold war to reach the
moon and spawn new industries. We used 9/11 to
create better body scanners and more T.S.A. agents."
Local governments, which continue to struggle with depressed tax revenue and declining aid from state governments, trimmed 35,000 jobs in September from a month earlier, mostly in education.
States and localities have already gone through a barrage of spending cuts to balance their budgets but the brunt of federal spending trims haven’t been implemented
yet.
Discretionary federal spending is expected to decline in fiscal years 2012 and 2013. The magnitude of such cuts is likely to become clearer by
Thanksgiving, when the so-called super committee releases its recommendations to reduce the federal deficit.
Pennsylvania lawmakers were expected to pass legislation next week
that essentially would amount to a state takeover of the city's
financial recovery plan. But late Tuesday, a divided Harrisburg city
council voted to file for Chapter 9 bankruptcy protection, becoming
the second city to file this year.
The filing comes amid tensions between city officials and state
lawmakers, who draw much of their power base from the suburbs. To
raise revenue, some Harrisburg officials want to impose a tax on
commuters into the city from the surrounding suburbs.
.......
For decades cities have avoided the idea of bankruptcy for fear of
ruining their standing among bond investors. But legal experts say
more cities are likely to use it as a way to seek concessions.
In Jefferson County, Ala., officials last
month used the threat of bankruptcy to wrest more than $1 billion in
concessions from debt holders, an unprecedented haircut in the
municipal-debt market. In August, Central Falls, R.I. filed for
bankruptcy protection after retired city workers refused to accept
an offer to cut their pensions.
A large pool of the chronically unemployed could create a long-term problem for the nation’s economy. The longer these individuals are out of work, the more difficult it is for them to find new employment.
......
Extended jobless benefits, available for up to 99 weeks, are coming under closer scrutiny, though. The extensions are set to expire
at the end of the year, which would remove more than 2 million recipients from the program by
early February.
President Barack Obama has proposed another extension (which would keep the maximum at 99 weeks) as well as a program that would allow long-term unemployed workers to receive benefits while doing an apprenticeship with a company.
Republicans in Congress are already voicing concerns about another
extension.
---------------------------
U.S. Had $1.3 Trillion Deficit in Fiscal 2011
By Corey Boles, WSJ, October 7, 2011
The federal government ran an estimated $1.3 trillion budget deficit in fiscal 2011, the same amount as in the previous year, the Congressional Budget Office said Friday.
In its monthly assessment of the government's finances, the nonpartisan congressional scorekeeper said the $1.3 trillion deficit was equivalent to
8.6% of gross domestic product, down from 8.9% in fiscal 2010 but still the third-highest percentage of GDP recorded since 1945.
.........
The budget gap is projected to balloon in future years largely owing to the rising costs of providing retirement and health benefits to
aging baby boomers. Congress has created a so-called super committee to propose ways to shrink the deficit by at least $1.2 trillion over 10 years.
I am told that around 750,000 permanent mortgage modifications have been done, which sounds like a lot, but it’s really just a start. Bankers estimate there are 5.5 million mortgages currently in foreclosure or tied up in bankruptcy. CoreLogic has said that nearly 11 million homes are currently valued below their current mortgage. That’s about 20% of U.S. homeowners, analysts say.
How do these people refinance responsibly? .....
See, we still make some great stuff: unmanned surveillance planes, jet fighters and other war materiel is made-in-USA equipment that does not get its due on business pages, but it’s real and deals are getting done. -----
Fareed Zakaria, August 14, 2011:"So ignore all those theories about China doing America a huge favor. The reality is, they have nowhere else to go. We're probably doing them a favor."
Question: What will happen if China, under higher stress levels, perceives this "favor" as a racket ? Would it help if U.S. just sells more weapons to Taiwan ?
If the only tool you have is a hammer, you'll see every problem as a nail ...
Anyway. Consider this: The bond market bubble will burst ("Treasuries should be avoided like the plague," Martin Hutchinson) once interest rates start to rise [Ref. 1], which is inevitable due to the persistent low economy growth & lack of demand [Ref. 2].
This state of the economy is called
stagflation: high inflation rate & low economic growth (Ken Rogoff calls it the Second Great Contraction).
The only difference from the previous cases of stagflation is the excessive liquidity and the current liquidity trap. Should this abnormally high volume of fake money is poured into U.S. economy by some unspecified "range of tools" (Ben Bernanke), nothing could possibly draw them out fast enough, to prevent galloping inflation.
Two months ago (June 17th), IMF Research Department Director Olivier Blanchard pictured the financial problems in the U.S. as "a bump in the road rather than something more worrisome", but look at the discrepancy between corporate profits and economic growth [Ref. 2]: the jump in corporate profits did not come from a healthy, bottom-up recovery. If Mr. Blanchard was physician, he probably couldn't tell apart an ordinary flu from H1N1 influenza.
Goldman strategist Alan Brazil posed a rhetorical question (August 16, 2011): "Solving a debt problem with more debt has not solved the underlying problem. In the US, Treasury debt growth financed the US consumer but has not had enough of an impact on job growth. Can the US continue to depreciate the world's base currency?"
It can and will, because it cannot avoid the Triffin dilemma. The endgame is either a default, or devaluation of US dollar -- overnight.
The current fiscal policy is a failure (Irwin Kellner). The Fed has used all monetary tools to "stimulate" the economy: "Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank," Ben Bernanke. The austerity measures are insurmountable: $1.5 trillion in deficit reduction over the next decade are not enough; U.S. needs to cut $10 trillion. Which of course cannot, and will not happen.
Bond bears: The rush to Treasurys could make a bad bond market even worse
Now bond bears say the latest rally is setting up the bond market for an even bigger crash once interest rates start to rise. .....
But even if rates stay low, counter the bond bears, the bubble is getting bigger -- and more dangerous. Most bonds are priced relative to Treasurys, so if the rates on Treasurys are too low, then so are the rates on everything else. If and when Treasury yields start moving upward, the losses will have a ripple effect (...).
If rates rise, bond holders could be forced to sell their bonds for less than what they paid (or at least less than what they are worth today). Longer-dated bonds are the most vulnerable, because the longer an investor has to wait for his bond to mature, the greater the chance that an increase in rates could diminish the value of that bond.
[Ref. 2] More Liquidity Only Douses Growth Sparks By Kelly Evans, WSJ, August 26, 2011
This is plainly evident in recent figures. Since the recession ended in mid-2009, U.S. corporate profits have jumped by about 43% to a record $1.45 trillion as of the first quarter, after taxes, inventory and accounting adjustments, according to the Commerce Department.
What hasn't recovered, however, is economic growth. Indeed, in real terms, gross domestic product hasn't even returned to its prerecession peak.
On Friday, Commerce data is likely to show GDP losing further ground. Second-quarter growth, originally reported at a measly 1.3%, is expected to be revised down to 1% in part because exports proved weaker than first thought. That follows GDP growth of just 0.4% in the first quarter, on a seasonally adjusted annualized basis.
In other words, in real terms the economy barely expanded in the first half of the year. Profits, too, now look set to weaken, as Friday's second-quarter figures are expected to show.
This has occurred even as the Federal Reserve has pushed its target lending rate to zero and embarked on unprecedented "quantitative easing" measures meant to stimulate the economy.
And, on Friday, Fed Chairman Ben Bernanke in a speech from Jackson Hole, Wyo. might outline even further steps to be taken.
Unfortunately, the U.S. is suffering from a lack of demand, not liquidity. As a result, ultraloose Fed policy has exacerbated the dichotomy between profit and growth.
By and large, companies aren't holding back on hiring and investment because of a lack of funds. Cash piles are at all-time highs and corporate balance sheets are in much better shape now than after the last recession in 2001.
So, as BofA Merrill Lynch notes, super-low interest rates have mainly spurred companies to refinance existing debt at lower rates, which boosts their bottom line. Roughly two-thirds of "junk"-bond issuance since 2009, for example, has been put to this use, according to Barclays Capital.
Trouble is, companies aren't exactly putting these freed-up funds to productive use. Their cash levels continue to rise while hiring remains anemic and investment is showing signs of slowing.
In short, it isn't a lack of fuel that is holding back the recovery—it is a lack of willing drivers.
===============================
Subject: James Rickards: "The Fed is clearly try out to trash the dollar." Date: Sat, 3 Sep 2011 03:54:02 +0300 Message-ID: <CAM7EkxkOU4hpij1cq2wGQU9fvhFX-pG+YPHiDG3n_O1JKLW08w@mail.gmail.com> From: Dimi Chakalov <dchakalov@gmail.com> To: James G Rickards <jrickards@omnisinc.com> Cc: Rolfe Winkler <rolfe.winkler@wsj.com>, Kelly Evans <kelly.evans@wsj.com>, Ronald D Orol <rorol@marketwatch.com>, William L Watts <bwatts@marketwatch.com>, info@omnisinc.com, TheTell@marketwatch.com
James G Rickards, Poor Summer Jobs Report: Can the Fed Help?, September 2, 2011, 04:26-04:30
Dear Mr. Rickards,
Why is the Fed trying to trash the dollar? Because there is no other option anymore:
Wishing you and your silent colleagues a nice weekend,
Dimi Chakalov
===========================================
Subject: The insoluble Triffin dilemma: Stagflation ? Date: Mon, 29 Aug 2011 15:14:55 +0300 Message-ID: AM7Ekxk0mC86f4VcMC2Z4sg9z3tyreKXzbqF6dxjZma6qo4Pmw@mail.gmail.com> From: Dimi Chakalov <dchakalov@gmail.com> To: Eddie Qian <eqian@panagora.com> Cc: Eric H Sorensen <esorensen@panagora.com>, Ronald Hua <rhua@panagora.com>, Jeremy Siegel <siegel@wharton.upenn.edu>, Robert Shiller <robert.shiller@yale.edu>, John B Taylor <JohnBTaylor@stanford.edu>, Laurence J Kotlikoff <kotlikoff@gmail.com>, Kenneth Rogoff <krogoff@harvard.edu>
Dear Dr. Qian,
I am respectfully requesting your opinion on the issues raised at
Wendy Liu, Head of China Research at the Royal Bank of Scotland: "If there's too much easing, then you have this wall of hot money coming into China. If there isn't any easing, and [the U.S.] economy is bordering on recession, that's also destabilizing for the global economy."
Dear Ms Liu,
I'm afraid you are not taking into account the roots of the problem: there is no chance for any "balanced" fiscal policy in the U.S.
In 2009, five banks held 80% of derivatives in America. Now, just
four banks hold a staggering 95.9% of U.S. derivatives, according to
a recent report from the Office of the Currency Comptroller.
The four banks in question:
JPMorgan Chase & Co. (NYSE: JPM),
Citigroup Inc. (NYSE: C),
Bank of America Corp. (NYSE: BAC) and
Goldman Sachs Group Inc. (NYSE: GS).
Derivatives played a crucial role in bringing
down the global economy, so you would think that the world's top
policymakers would have reined these things in by now - but they
haven't.
Instead of attacking the problem, regulators have let it spiral out
of control, and the result is a $600 trillion time bomb called the
derivatives market.
...........
A governmental default would panic already anxious investors,
causing a run on several major European banks in an effort to
recover their deposits. That would, in turn, cause several banks to
literally run out of money and declare bankruptcy.
Short-term borrowing costs would skyrocket and liquidity would
evaporate. That would cause a ricochet across the Atlantic as the
institutions themselves then panic and try to recover their own
capital by withdrawing liquidity by any means possible.
And that's why banks are hoarding cash
instead of lending it.
............
Big Banks Are About to
Get Blasted by the Volcker Rule
By David Zeiler, Money Morning,
October 13, 2011
The rule aims to ban proprietary trading, in which the banks traded
for their own benefit rather than for the benefit of their
customers, but also will address other areas such as hedge fund
investing.
To prevent cheating, complex compliance rules will require that
banks prove that all their trading activities are for clients'
benefit, and not proprietary. Compliance alone is expected to tack
on another $2 billion in costs.
........
For the big banks, there is no silver lining to the Volcker Rule,
unless you count the fact that they still have time to lobby the
government for changes. But given the public animosity toward Wall
Street these days, any meaningful adjustments will be hard won.
===========
Why the Fed's Latest
Rescue Effort is Doomed
By Keith Fitz-Gerald, Money Morning,
December 1, 2011
You can stimulate all you want with low rates, but if businesses
cannot see a reason to spend money to turn a profit, they won't. And
there's going to be little the government can do to encourage them
to spend the estimated $2 trillion a Federal Reserve report
estimates they're sitting on.
Similarly, if banks cannot see a reason to lend with reasonable
security that loans will be repaid, they won't. And there's nothing
the central bank can do about it, either. Neither low interest rates
nor low-cost debt swaps will change the fact that companies and
individuals are shedding debt as fast as they can despite the cost
of borrowing being almost zero.
If anything, the Fed's newest harebrained scheme is going to make
things worse.
.......
Exactly how much damage lurks? There are
more than $600 trillion in derivatives contracts that we know
about. And there are potentially trillions more in collateral
requirements that we still don't know about. These things are
entirely unregulated -- and that's a huge part of the problem, even
now.
Nobody knows what the impact will be, but we undoubtedly will find
out.
Watch Alessio Rastani, September 26,
2011, 02:16 - 02:45
Subject: “So far, so good!” said the man who fell off the 50-story building, as he passed
the 12th
floor... (December 23, 2011) Date: Wed, 14 Sep 2011 18:15:46 +0300 Message-ID: <CAM7EkxnsrecgjOD8ij9Xe=Fxfd-SLgNxzrD1j-9eAMV5eNu6Vg@mail.gmail.com> From: Dimi Chakalov <dchakalov@gmail.com> To: Olivier Blanchard <oblanchard@imf.org>, Reza Moghadam <imfconsultation@imf.org>, Prakash Loungani <ploungani@imf.org>, Giovanni Dell’Ariccia <gdellariccia@imf.org>, Paolo Mauro <pmauro@imf.org>, Jeremy Siegel <siegel@wharton.upenn.edu>, Robert Shiller <robert.shiller@yale.edu>, John B Taylor <JohnBTaylor@stanford.edu>, Jeffrey Frankel <jeffrey_frankel@harvard.edu>, Laurence J Kotlikoff <kotlikoff@gmail.com>, Kenneth Rogoff <krogoff@harvard.edu>, Carol Osler <cosler@brandeis.edu>, Rolfe Winkler <rolfe.winkler@wsj.com>, Kelly Evans <kelly.evans@wsj.com>, Jeffrey Sparshott <jeffrey.sparshott@dowjones.com>, Ronald D Orol <rorol@marketwatch.com>, William L Watts <bwatts@marketwatch.com>, Damian Paletta <damian.paletta@wsj.com>, Alen Mattich <alen.mattich@dowjones.com>, Nerys Avery <navery2@bloomberg.net>, Paul Panckhurst <ppanckhurst@bloomberg.net>, David Wessel <capital@wsj.com>, Gerald Seib <jerry.seib@wsj.com>, Wendy Liu <wendy.m.liu@rbs.com>, Alvin Chong <alvin.chong@shkf.com>, Jeff Cox <jeff.cox@nbcuni.com>, John Carney <john.carney@nbcuni.com>, Peter Schiff <schiff@europac.net>, Katie Martin <katie.martin@dowjones.com>, Li Yuan <li.yuan@wsj.com>, Shen Hong <hong.shen@dowjones.com>, Loretta Chao <loretta.chao@wsj.com>, Amy Chua <IdeasMarket@wsj.com>, Chuin-Wei Yap <Chuin-Wei.Yap@dowjones.com>, Shai Oster <shai.oster@wsj.com>, Andrew Batson <andrew.batson@wsj.com>, Stephen Dinan <sdinan@washingtontimes.com>, rsylla@stern.nyu.edu, rsmith@stern.nyu.edu, jeff.feig@citi.com, conor.dougherty@wsj.com, jweisenthal@businessinsider.com, nick.hastings@dowjones.com, lauren.mills@wsj.com, dave.kansas@wsj.com, mark.gongloff@wsj.com, marketbeat@wsj.com, newseditors@wsj.com, blinder@princeton.edu, Irwin Kellner <Ilkellner@gmail.com> CC: Brett Arends <brett.arends@wsj.com>
Dear colleagues,
Sorry for this bulk email.
I am respectfully asking you to educate your audience about *the only viable* option to fix the US economy, as suggested by Brett Arends (Sept. 12, 2011, 12:00 a.m. EDT):
Please raise your voice, debate extensively, and try to find any alternative to the proposal by Brett Arends -- people need to be educated ASAP.
Also, please consider the (incomplete) list of forthcoming problems:
1. The austerity crisis of municipalities -- since May 6th this year, Tim Geithner ordered to stop issuing the non-marketable State and Local Government Series securities (SLGS), which are designed to help state and local governments pay for their debt.
2. The payroll tax cut and extended unemployment benefits cannot, and will not be renewed at year-end: "This tightening represents fiscal restraint of about 2% of next year’s gross domestic product — enough to drag the weak economy back into recession, if it isn’t already in one by then" (Some economic lessons from history, by Irwin Kellner, MarketWatch, Aug. 16, 2011, 12:01 a.m. EDT).
3. Also by year-end (December 23rd), $1.2 trillion (or more, if the bipartisan Super Committee succeed to impose tougher austerity measures) will be automatically cut off.
Recall the rosy predictions last year for the first half of 2011. I'm afraid Fed economists will continue to contaminate reality with wishful thinking. You just have to stop this very VERY dangerous trend !
Comment: It is really a no-brainer. Imagine a guy walking on a road with a huge rack of stones on his back. He's been walking much slower than what "we hoped" (Ben Bernanke), and now he has to climb a steep austerity mountain. No way.
Why not help him by unloading the heavy rack from his back?
If he has to pay back $300.000 for a house that is actually worth much less, say,
$90.000, but can't pay back even these $90.000,
he will never ever pay the inflated price of
$300.000.
No way.
Nearly 11 million homes are currently valued below their current mortgage. That’s about 20% of U.S. homeowners (Jon Markman, Sep 2, 2011, 1:24 pm EDT). That's the 'rack of stones' hanging on the back of the same people who are asked to revive the US economy and to accept severe austerity measures in 2012.
How much debt will be created by writing off these home mortgages? Go ahead, calculate it. Because the other option, that of 'creating jobs', isn't going to help. No way.
Unfortunately, the vast majority of the people at the list above support the Wall Street [Ref. 1]. Not the guys from the main street. Remember Jim Cramer?
"Bear Stearns is fine. Bear Stearns is not in trouble. Don't be silly... don't move your money."
Jim Cramer still hasn't apologized to his audience for this ridiculous advice, and will never endorse any proposal that could
"hurt" the Wall Street banks. But look at the recent municipal bankruptcy of Jefferson County, Alabama: J.P. Morgan Chase & Co. (last year, CEO Jamie Dimon collected $23 million in bonuses) have agreed to forgive $1.18 billion. Yes they can.
I do hope the people above will support Brett Arends' proposal. It will certainly help the US economy in the forthcoming Lehman Brothers II crisis: “When it happens, it’s going to happen fast, and it’s going to be ugly and very deep.”
D. Chakalov September 15, 2011 Last updated:
October 16, 2011
If ultra-low rates and quantitative easing haven't put a dent in unemployment or spurred economic growth, then why expand on those programs?
The answer: Because the Fed doesn't work for the American public - it works for Wall Street.
That's right. It's not the economy the Fed has on life support - it's the banks.
America's banks are facing huge litigation costs. Worse, they've grown entirely dependent on the Fed's easy-money policy.
So the Fed is going to bail them out - again.
And we're going to be the ones who pay for it. ......
Essentially, the Fed is playing with fire. Artificially low rates are distorting free markets, true risk measures, and the economy. And by telegraphing its moves, the Fed is creating volatility that clouds long-term investment horizons.
If the Fed didn't telegraph its moves, volatility would be short-lived since market participants would make rapid adjustments to Federal Reserve policy decisions reflected in their open market trading operations - not their articulated policy pronouncements .
The proposal by Brett Arends
(explained above) was not endorsed (DJ
Newswires SVP & Managing Editor
Neal Lipschutz doesn't even mention it).
People in the US desperately need a breakthrough message and
genuine help from their leaders, to spark enthusiasm and set the
recovery on the right track.
You can't invoke
creation of jobs and
demand with stimulus. No way. You need to fix the initial
problem, from which the current crisis unfolded: the housing
industry is the only leader out of recession. You need
a
genuine change.
"Considering all of this, is
Europe’s currency really worth 36% more than the U.S. currency? Really?
"Unemployment is just as high in Europe, at 9.5%, as in the U.S. Economic
growth is slowing, just as in the U.S. Europe’s banks are at greater risk.
And it costs more for every country in the EU, including Germany, to borrow
than it costs the U.S.
.....
"The center of the euro cannot hold. Even a dummy who doesn’t give investing
advice can see that."
Comment: Even a dummy
who doesn’t give investing advice [Ref. 1] can see the huge difference between the
U.S. and
Eurozone -- the Triffin Dilemma.
Ultimately, the interest rates
will have to be raised, and we all will witness the crash: watch Peter
Schiff,
19:10 - 22:35.
Then people like David Weidner
will "explain" the difference between the Eurozone and U.S., only it will be
too late.
D. Chakalov
September 20, 2011
Last updated: September 22, 2011
[Ref. 1] Honesty is the best policy — and advice
When is fiduciary duty just a suggestion?
By Chuck Jaffe, MarketWatch, Sept. 22, 2011, 12:01 a.m. EDT
Simply put, consumers turn to advisers for help; if they don’t know that something better exists than what they are getting — and if they knew the best solutions, they would most likely invest without advisers — it’s going to be hard for them to figure out if they are being ripped off.
That’s precisely why a fiduciary standard is needed. It’s not going to stop rogues and criminals, but it will force an honest lot — because I do believe the vast majority of financial advisers want their clients to make good money — to adhere to a higher standard.
It will force them to not only acknowledge that honesty is the best policy, but to make it their policy.
Insider stock purchases, which surged above $100 million a day in the market slump last month, have now collapsed to just $13 million a day.
Meanwhile the ratio of insider sales to purchases has skyrocketed. Today insiders are dumping
$7 in stock for each $1 that (other) insiders are buying.
That’s a worrying ratio. Six weeks ago the amounts of purchases and sales were about equal.
It’s the kind of news that should give investors pause.
What insiders do with their own money is one of the stock market’s best barometers.
====================================
China, the dollar, and the return of the Triffin dilemma By Benn Steil, 12 January 2010
The United States seems happy to continue the game of chicken, reckoning that as long as China refuses to appreciate its currency, it has no choice but to continue to gobble up low-yielding dollar debt. Despite warnings from Governor Zhou and other top Chinese officials that it will seek alternatives, the United States doesn’t believe China has any. A move by China to diversify into other currencies would slam the purchasing power of its huge stock of dollar assets. China would not cut off its nose to spite its face. ....
We would be going back to the immediate post-WWII period, when the trading system had transmogrified into a contentious web of bilateral barter. In those days, it was a dollar shortage that destroyed multilateral trading. Tomorrow it may be a dollar glut that does it.
"So there's no likelihood whatsoever that this particular company is able to pay down from its own resources the amount of debt that it has, nor is there any likelihood that it's going to get rid of its deficit. If that was a real company, of course, that would be a junk bond. .........
"We have people buying Treasury securities because they're worried about the Treasury. We've got people selling banks stocks, taking the cash and putting into the banks for safety. It doesn't make sense. What you're seeing is this adjustment is occurring and people are not sure how to react to this adjustment."
U.S. bank lending has been on the decline since March, with overall
loan volume falling between 0.1% and 3.2% each week, according to
the Federal Reserve.
Reserves at the U.S. Central bank have risen by $1.6 trillion while
overall lending has declined by $84 billion. That’s a bad sign for
an economy that needs to fuel a recovery at least in part through
credit.
So, is it just a matter of credit tightening amid a down cycle or is
there another force at work?
Dick Bove, the Rochdale Securities bank analyst,
argues Friday that government policies have made credit harder to
come by. He says federal policies have broken the system. Among the
misdeeds: required increased capital levels and liquidity
requirements (explaining the increase in Fed reserves), low interest
rates that cut profits on lending, flattening of the yield curve
reducing the incentive to lend at all, mandated price controls on
some banking products and, finally, raising costs through regulatory
“burdens.”
........
Moreover, that’s why even the most resilient of banks, such as J.P.
Morgan Chase & Co. JPM, are down more than 30% year to date, while
the S&P 500 SPX is only off a little more than 10%.
Easy money may have helped the economy in the past, but it does not appear to be of much help this time. So how should we judge current monetary policy?
I would give it a B, at best. It’s not a great grade, but it’s a lot better than the grade I would give today’s fiscal policy — a failure. ......
... fiscal policy is set to tighten at year-end. Both the payroll tax cut and extended unemployment benefitsexpire unless extended — an unlikely event, given the prevailing winds blowing down Pennsylvania Avenue.
This tightening represents fiscal restraint of about 2% of next year’s gross domestic product — enough to drag the weak economy back into recession, if it isn’t already in one by then.
==============================
Former IMF Chief Economist Ken Rogoff, Harvard University: "It is not a typical recession."
GDP Is a Lie – It’s Time for a New Measure of Economic Growth By Martin Hutchinson, Money Morning, August 23, 2011
The Lie Washington Has Been Telling Us Since 1934
Gross domestic product is supposed to be a measure of all the goods and services produced here at home.
But there's a discrepancy.
You see, private-sector output is measured by the price people are prepared to pay for it. But government output is fudged: It's measured by its cost.
That means GDP increases any time the government spends money. It doesn't matter if that money is actually put to productive use or not - GDP rises nonetheless. .....
That gives you a net number, which we can call "gross private product," or GPP. It's a measure of all the output produced by the private sector. In general, it will underestimate national "welfare" unless government is really bad. But it will give you a much better idea of the output the market economy is producing. .....
That doesn't guarantee we won't have a "double-dip" recession, but it does indicate that if we keep government spending under control, and stop Federal Reserve Chairman Ben Bernanke from throwing money at the economy (which simply causes speculative bubbles, and does no good), then a real, healthy recovery is possible.
The private sector creates jobs, and pays for government. We need to keep track of its output through GPP, and run the economy to put GPP on a healthy long-term growth path.
39 adult economists "predicted" a colossal jump -- 1800% -- in consumer spending, from 0.1% in Q2 to 1.8% in Q3 (perhaps with some sophisticated Magic 8 Ball algorithm). Is the stock market going to follow these "predictions", with Dow Jones surging to 13,500+ in Q3?
Why a U.S. Default Will Be a Good Thing By Martin Hutchinson, Money Morning, August 11, 2011
That will be very painful in the short run, but in the long run will be a good thing. ....
Just imagine a world in which investors won't lend to governments: That's a world in which governments cannot overspend - they won't have the money.
That's a world in which resources cannot be diverted from the productive to the unproductive. That's also a world in which economic power is determined by success - and one in which the chairman of Coca-Cola has more credibility than the U.S. Treasury secretary. Our leaders down in Washington may think that such a world is pure hell - a civil servant's version of Dante's Inferno.
But for investors like you and me, a world like that - where everything makes sense - is a financial Nirvana.
.......
Comment from RJD | August 11, 2011: "A formal defalut will not occur, as we can just print money to pay back the debt. That is a little better scenario, but still has downsides. Galloping inflation. A gradual refusal of foreigners to buy our debt. More inflation as we print money so the Fed can buy it. Pray the Tea Party GOP takes full control in 2012 and makes the cuts that are necessary before we enter any of the scenarios above."
Subject: When it rains, it pours (祸不单行) Date: Thu, 18 Aug 2011 16:50:55 +0300 Message-ID: <CAM7Ekxk0xRsMB3-+06k_8=VGuuhuu_Ljc9RCAxLsRHxrAaPLvg@mail.gmail.com> From: Dimi Chakalov <dchakalov@gmail.com> To: Alvin Chong <alvin.chong@shkf.com> Cc: investor.relations@shkf.com, dt29@soas.ac.uk, coliver@marketwatch.com, rponnuru@bloomberg.net, blinder@princeton.edu, master@dagongcredit.com, rong_xiaoqing@hotmail.com, min.zeng@dowjones.com, editor@globaltimes.com.cn, contribution@china.org.cn
Dear Dr. Chong,
I watched your CNBC interview (16 Aug 2011) very carefully. May I share with you and your colleagues my concerns.
Imagine yourself in the shoes of Fed Chairman Ben Bernanke.
He is fully aware that China has already suffered a loss of $271.1 billion between 2003 and 2010 as a result of the dollar’s steady depreciation. Two months ago, China’s National Development and Reform Commission announced "it could lose another $578.6 billion if it continues to hold these huge loans to the U.S." (Martin Weiss). The existing QFII and the program announced by Zhou Xiaochuan ("moving to a reserve currency that belongs to no individual nation," March 24, 2009) will ultimately lead to the "tipping point" at which "we could have greater use of the renminbi as a reserve currency" (Damian Tobin).
Surely this 'tipping point' is some years away, but a sudden rejection of U.S. debt by the world’s investors is far nearer:
"There is abundant liquidity available to finance economic expansion and job creation in America. The banking system is awash with liquidity. (...) U.S. corporations are sitting on an abundance of cash--some estimate excess working capital on publicly traded corporations’ books exceeds $1 trillion--well above their working capital needs.
"I do not believe it wise to commit to more than that, or to signal further accommodation, when the cheap and abundant liquidity we have made available is presently lying fallow, and when the velocity of money remains so subdued as to be practically comatose."
Jun Ma: "Sixth, the Euro fixed income market is the second-most liquid after the US market, but many European sovereigns (e.g., the Spanish and Italian) are facing significantly higher default risks than US Treasuries."
What is good for the Euro is good for the Yuan, and vice versa.
D. Chakalov ------ Examine the objects as they are and you will see their true nature; look at them from your own ego and you will see only your feelings; because nature is neutral, while your feelings are only prejudice and obscurity.
Overall, foreign investors bought a net $3.7 billion of long-term U.S. assets in June, down sharply (654 per cent - D.C.) from $24.2 billion in May.
How Bonds Can Lose More Than 50 Percent By Michael Carr, Moneynews, 3 August 2011 09:56 AM
If interest rates go up, a possibility if inflation rises, the value of bonds will fall. Traders will be paying less for bonds because if inflation rises above 3.125 percent, there isn’t any profit from the interest.
If interest rates go up by as little as 0.5 percent a year, the bond would fall in value to $1,000. Bond holders would lose 26 percent on their bonds if that happens, and they’d be receiving interest that doesn’t really even keep with inflation.
Yields were about 5 percent in the summer of 2007, before the financial crisis led to bailouts and quantitative easing programs that have ended. If the interest rate went back to 5 percent, the price of the bonds would fall to about $600, more than 50 percent lower than they are today.
The New Abnormal: Permanently Engineered Market Volatility By Shah Gilani, Money Morning, August 19, 2011
Wall Street finally got what it wanted on July 6, 2007, when the Securities and Exchange Commission (SEC) did away with the "uptick rule." As of that day, it was no longer necessary to wait for a stock to go up in price before short-selling it. Without the uptick rule, short-sellers can short any stock, at any price, at any time.
There's plenty more that Wall Street has done to ratchet up volatility. It has flooded the world with derivatives that aren't regulated, and blessed high-frequency trading. It also introduced innumerable securities and financial instruments that it can arbitrage for healthy profits against unsuspecting institutions and the public.
Not surprisingly, market volatility is now a tradable product. And now that Wall Street has taken us down this path of entrenched, institutionalized volatility, there's no going back.
Don't expect any respite from what's going on in the markets now. On the surface, it's all about Europe, debt, downgrades, earnings, fundamentals and technicals. But underneath all those prime movers are the real shakers, the greasy palms of the markets hidden hands.
Abnormal is the new "normal."
=========================================
Subject: Finding a Prescription for the U.S.'s Money Trap: Remedy #2, overnight Date: Sat, 6 Aug 2011 12:48:33 +0300 Message-ID: <CAM7Ekxm3cVDtsZyPYRV=3KHPCz2x8Xr0wvZU9Uph4Z+41iHqVA@mail.gmail.com> From: Dimi Chakalov <dchakalov@gmail.com> To: Lars E O Svensson <lars.svensson@riksbank.se> Cc: David Wessel <capital@wsj.com>, Kenneth Rogoff <krogoff@harvard.edu>, Martin Feldstein <msfeldst@nber.org>, Jeremy Siegel <siegel@wharton.upenn.edu>, Robert Shiller <robert.shiller@yale.edu>, John B Taylor <JohnBTaylor@stanford.edu>, Laurence J Kotlikoff <kotlikoff@gmail.com>, Jeremy J Nalewaik <jeremy.j.nalewaik@frb.gov>, Diane Vazza <diane_vazza@standardandpoors.com>, Beth Ann Bovino <bethann_bovino@standardandpoors.com>, DU Mingyan <master@dagongcredit.com>, Mu Xuequan <xxp69@xinhuanet.com>, Jon Hilsenrath <Jon.Hilsenrath@wsj.com>, publicaffairs@imf.org, ieo@imf.org, media@imf.org, bfcoffice@worldbank.org
Dear Dr. Svensson,
Your suggestion to devaluate the currency is listed as 'remedy 2' [Ref. 1]. I believe it tallies to the two options explained by Mohamed El-Erian (August 2, 2011, 2:34:51 PM, 13:04 - 13:34),
A liquidity trap is a rare condition which appeared during the Great Depression and was thought to have been wiped out until it reappeared in Japan in the 1990s. The U.S. has contracted a severe case.
The condition is characterized by an economy in which interest rates are so low that consumers, business and investors don't care if money is in cash or in interest-paying investments. BNY Mellon was reacting to a run to the bank by companies fleeing even U.S. Treasury bills for the safety of the bank. .....
Two, Lars Svensson, now deputy governor of the Swedish central bank, sees one "foolproof way of escaping from a liquidity trap"—devalue the currency. "This," he wrote in 2001 while in academia, "will jump-start the economy and escape deflation."
Although the U.S. government and the Fed have, though not explicitly, been counting on a decline in the dollar to help boost exports, an explicit dollar-weakening campaign is unlikely—and unwise given the dollar's role as anchor of the global financial system. ........
Three, the interest rate that matters in the economy is the sticker-price rate adjusted for inflation. So some economists argue that the way out of the trap is for the Fed to convince everyone it's going to create more inflation. If inflation goes up and interest rates don't, then the inflation-adjusted interest rate falls—and goes negative—and that will give people cause to borrow and spend.
This appeals to Kenneth Rogoff, the Harvard economist who argues that adding to the already-heavy government debt burden (see option one) is a mistake: "The only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4% to 6% for several years." Incomes rise with inflation, debts wouldn't, and they'd be easier to pay off. --------
Note: If Ben Bernanke is smart, he will not wait for the inflation shock, but will devaluate the dollar overnight, shortly after the FOMC Meeting on August 9th. If he acts according to the expectations of Sir Winston Churchill (see above), he will wait for the inflation shock, and then devaluate the dollar overnight. There is no third option on the table. The second option, however, could lead to "a final and total catastrophe of the currency system involved" (Ludwig von Mises).
"There are few alternative safe-haven assets out there that can match the depth and liquidity of the Treasury market, which has more than $9.3 trillion debt outstanding. What do you think? Are U.S. Treasurys still the standard?"
As of August 9th, two-thirds of (presumably) educated people voted in favor of U.S. Treasurys, but are U.S. banks safe?
If banks were safe, why is gold raising to record high $1,746 ?
Moreover, let's not forget the towering austerity crisis of municipalities, which is about to unfold in the nearest future -- since May 6, 2011, Tim Geithner ordered to stop issuing the non-marketable State and Local Government Series securities (SLGS), which are designed to help state and local governments pay for their debt.
I will update this note after the Fed’s policy decision, due at 2:15 PM ET.
D. Chakalov August 9, 2011, 12:48 GMT
Update: Unfortunately, there was no word, not even a hint about helping the municipalities. Instead, the Fed Chairman promised todayonly to keep the federal funds rate at 0 to 1/4 percent "at least through mid-2013."
Gold was fluctuating today between $1,722 - $1,775. Also, the dollar "fell 5.2 percent to 71.50 Swiss centimes at 3:07 p.m. in New York, from 75.50 yesterday, after touching a record low 70.71 centimes," as reported by Bloomberg.
Check out the tips from Porter Stansberry here (on February 16th, a gold ounce was traded at $1,374, that is, it gained $400 in six months).
Perhaps Ben Bernanke should borrow the idea of Tim Geithner to go home due to "family considerations" -- surely his wife Anna and kids Alyssa and Joel miss him badly (not to mention his cat, dog, and mother-in-law). The obvious person to replace him is Bill Gross.
Then everything will be just fine, U.S. economy included.
D.C. August 9, 2011, 20:43 GMT
------------
Of all the things that the Fed has done over the last few years or might be considering in the near future, this is the most foolish. Policymakers undoubtedly view this commitment [keeping the federal funds rate at 0 to 1/4 percent “at least through mid-2013”] as conditional, and the plain language of the statement is conditional – “The Committee currently anticipates that economic conditions…are likely to warrant…” However, market participants clearly perceive this commitment as unconditional. If growth continues to be anemic and inflation is benign over the next two years, no obvious harm will be done. However, if facts on the ground change, the Fed’s credibility will be ruined.
Let’s imagine hypothetically that inflation is 5% a year from now. The FOMC has two choices. It can uphold its commitment to keep rates steady, in which case, it will lose its inflation-fighting credibility entirely (though, of course, if inflation is 5%, then their credibility will already be tattered). Or, it can break what the market views as a promise, which will also destroy its credibility. Damned if they do, and damned if they don’t. In short, this is pure and simple a ridiculous strategy.
Subject: China at a crossroad: How to reduce inflationary pressure Date: Tue, 16 Aug 2011 02:08:56 +0300 Message-ID: <CAM7EkxnK3c4eozLqKHsACpjtexH9fugvucAa4vHf7tsM+-2pjw@mail.gmail.com> From: Dimi Chakalov <dchakalov@gmail.com> To: Rong Xiaoqing <rong_xiaoqing@hotmail.com>, editor@globaltimes.com.cn, dinggang@globaltimes.com.cn, james@james-chau.com, editor@china.org.cn, contribution@china.org.cn, master@dagongcredit.com
Regarding the advice from Dale W. Jorgenson (cf. the link above): "If the world goes into another recession (as a result of the current crisis), China should use the opportunity to dampen the level of economic activity and shift from exports toward domestic output. This should help to reduce inflationary pressures in China."
If U.S. goes into deeper recession, the ONLY way to pay its bills will be a sudden devaluation of its currency -- overnight,
Subject: Re: First Federal Reserve Audit Reveals Trillions in Secret Bailouts Date: Tue, 30 Aug 2011 13:19:06 +0300 From: Dimi Chakalov <dchakalov@gmail.com> To: Carlos Perelman <perelmanc@hotmail.com> Cc: Silver Shield <ss@sonsoflibertyacademy.com>, editors@ipsnews.net, Lars E O Svensson <lars.svensson@riksbank.se>, David Wessel <capital@wsj.com>, Martin Feldstein <msfeldst@nber.org>, Diane Vazza <diane_vazza@standardandpoors.com>, Beth Ann Bovino <bethann_bovino@standardandpoors.com>, DU Mingyan <master@dagongcredit.com>, Mu Xuequan <xxp69@xinhuanet.com>, Jon Hilsenrath <Jon.Hilsenrath@wsj.com>, publicaffairs@imf.org, ieo@imf.org, media@imf.org, bfcoffice@worldbank.org, G Geoffrey Booth <boothg@msu.edu>, Gabriel Hawawini <gabriel.hawawini@insead.edu>, Christian Wolff <christian.wolff@uni.lu>, Yiuman Tse <yiuman.tse@utsa.edu>, Simon Benninga <benninga@post.tau.ac.il>, Henri Servaes <hservaes@london.edu>, Lucio Sarno <lucio.sarno@city.ac.uk>, Carol Osler <cosler@brandeis.edu>, G Andrew Karolyi <karolyi@cob.osu.edu>
Dear Carlos,
> First Federal Reserve Audit Reveals Trillions in Secret Bailouts. Guess how > many trillions ? Dimi was close in his website. It appears that it was 16 trillion > ....
Thank you for the link. Seems to me Silver Shield reported it on July 25th,
Christine Lagarde (00:52-01:32): For example, the dollar has always enjoyed what Giscard d'Estaing, the former French president many years ago, called the “exorbitant privilege” of the dollar, because it was the currency – the reserve currency that most central banks had. Well, clearly, there was a dent in this exorbitant privilege and the confidence that most people have towards the dollar. It would probably entail a decline of the dollar relative to other currencies, and probably doubts in the mind of those people who reserve currencies as to whether the dollar is effectively the ultimate and prime currency of reserve.
.........
In Debt-Ceiling Chicken, Markets Are Betting the Wrong Bird By David Weidner, WSJ, July 28, 2011 10:02 A.M. ET
Admit it. Part of you wants to see Washington blow it. You want to see our national debt downgraded. Deep down inside, against your more rational instincts, you want to see a U.S. debt default. We haven't had a real default since powdered wigs and tricornered hats were in vogue.
The reason, maybe the only reason, we like games of chicken is because of the potential for disaster. We want to see someone wait too long, past the moment of no return. And the funny thing about it is as that moment comes closer—in this case Aug. 2—we want to see it happen even more.
The cuts being discussed are illusory and are not cuts from current amounts being spent, but cuts in prospective spending increases. This is akin to a family saving $100,000 in expenses by deciding not to buy a Lamborghini and instead getting a fully loaded Mercedes when really their budget dictates that they need to stick with their perfectly serviceable Honda.
Bill Gross, Investment Outlook: The Ring of Fire, PIMCO, February 2010
Pain From Debt Impasse Spreads in Markets By Tom Lauricella, Matt Phillips and Alex Frangos (with Jeannette Neumann and Vauhini Vara), WSJ, July 27, 2011, 5:46 A.M. ET
The dollar tumbled across the board and stocks slid for the third consecutive day. In the U.S. Treasurys market, investors pushed down prices of bills maturing in August, when the deadline for raising the federal debt limit is expected to be hit.
The shadow from the budget morass also spilled into the municipal-bond market, where California lined up emergency financing to head off any problems should Washington not reach a timely resolution of the problem. Maryland pressed ahead with a smaller bond offering after cutting one part of the deal because of worries about a possible U.S. downgrade. .......
In the market for credit-default swaps, insurance-like contracts designed to pay off in the event of a default, prices for one-year protection on U.S. debt has surged in recent days and is now more expensive than buying protection for five years.
If I were, particularly, a foreign holder of U.S. debt, I'd be asking myself, 'Who is running that country'. This is like riding on a motorcycle and going right in front of an 18-wheeler. Are they out of their minds?
The US economy is like Wile E Coyote who runs off the cliff and it takes him a while to realise it. What has been keeping him up is Chinese blowing air up.
Treasury Crafts a Plan: Who Gets Paid, Who Doesn't By Damian Paletta (with Laura Meckler, Victoria McGrane and Deborah Solomon), WSJ, Thursday, July 28, 2011
Paying bondholders ($25.6 billion in quarterly interest payments on coupon-bearing Treasuries due August 15th - D.C.) before Social Security recipients, for example, would likely spark political outrage and could lead to lawsuits and market disruption, including a potential downgrade of U.S. debt by credit-ratings firms.
The administration is under increasing pressure from bondholders, senior citizens, lawmakers, and others to say how it will prioritize payments. Detailing its plans could be a move by the Treasury to stem growing uncertainty in financial markets about what could happen next week, but it could also open it up to political second guessing and might spark the crisis it is designed to avoid. .........
Former administration officials say there is no simple answer for how Mr. Geithner's team might navigate such a situation, and that prioritizing some government payments over others would be a technical and logistical nightmare. Many payments are computerized and it isn't clear that systems could be reprogrammed in time.
In recent days, administration officials have described decisions that they could have to make after Aug. 2 as "unthinkable."
"So what do you say? Who do you pay? That's an impossible situation that this country has never faced, and should never face if Congress does what it was elected to do and does its job," said White House spokesman Jay Carney. Sen. Orrin Hatch of Utah, the ranking Republican on the Senate Finance Committee, asked Mr. Geithner to specify by 5 p.m. Thursday what plans Treasury had to pay its bills if the ceiling isn't raised.
He also asked the Treasury to give details of how much money it expected to bring in and spend between the end of July and the end of August—something it hasn't done.
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Banks Get Scant Help Preparing for Default By Victoria McGrane, WSJ, July 22, 2011
The planning process has generated numerous questions, bankers say, and while they have a good idea what the answers may be, regulators have been either unwilling or unable to provide definite answers.
Treasury, for instance, has declined to answer questions about which payments it would skip if it can't pay them all. So it's not clear if it would miss any interest payments, and thus default on its debt. .......... Banks are setting up plans for dealing with increased volatility, a decline in liquidity, and what would happen to their Treasury bond holdings if they were no longer rated AAA by ratings agencies. They are also trying to determine what would happen to funding markets.
But just as important, some banks are trying to determine what would happen if there was a severe financial panic and many of their customers—such as federal workers and contractors—were no longer paid, leading to a spike in missed mortgage payments and overdrawn bank accounts, among other things.
U.S. banks hold a total of about $1.6 trillion worth of Treasurys and other U.S. government securities as assets on their balance sheets. Because they are seen as relatively riskless, banks don't have to add to their capital buffers to protect against losses when they buy Treasurys under U.S. capital rules.
In the case of default or downgrade, the value of Treasurys held by banks is likely to fall. Given how much U.S. debt banks are holding, even a small drop in value could translate into a big hit to balance sheets. If it's big enough, some banks could see solvency threatened.
According to one banking industry representative, there are indications banks are beginning to take steps to adjust their holdings of Treasurys to prepare for the possibility of default.
A large chunk of outstanding U.S. Treasury debt is used by banks as collateral in the repurchase, or "repo" market as well as in the futures and swaps markets. A default, bankers fear, could throw these markets into disarray if the value of the collateral they depend on is thrown into question.
"It's hard to over-state the importance of AAA-rated Treasurys in the financial system," said John Dearie, executive vice president for policy at the Financial Services Forum, a trade group that represents the 20 largest U.S. financial services firms. "A downgrade of their status from virtually risk-free to something less could be enormously disruptive to the financial system."
Finally, it's unclear whether regulators would require banks to raise capital against Treasurys in the case of default. Most observers believe regulators wouldn't do this, but regulators haven't said.
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As US Debt Impasse Continues, Risks Loom In Repo Market
The key concern is that Treasury bonds might no longer be considered top-quality collateral in repurchase agreement markets -- better known as repo -- thereby choking a primary channel of short-term funding for banks. That in turn could push investors such as U.S. money funds to cut lending to banks, stifling liquidity and pushing up the cost of funding.
Repo, which grew to become the so-called "shadow banking system," is often regarded as the oil that lubricates the economy. Higher borrowing costs would have a broad impact, hurting everything from consumer borrowing to corporate finances. .....
There are about $3.94 trillion in Treasurys used as collateral for repos, according to data from J.P. Morgan. Another report from Bank of America Merrill Lynch says that roughly 74% of primary dealer repo financing--about $2.1 trillion--involves Treasury collateral.
If the debt ceiling is not raised in time and the U.S. is forced to default, the impact on repos would be profound as the value of the collateral outstanding would immediately be put into question.
=======================================
Making the Call on U.S. Credit Rating By Damian Paletta, WSJ, July 22, 2011
A downgrade would likely prompt lenders to demand a higher interest rate from the U.S. government to compensate for the increased risk of holding American debt, thereby raising the cost of borrowing. Because so many other interest rates are pegged to the cost of Treasury debt, including business loans, mortgages, credit cards, and student loans, a downgrade could be felt by all Americans. ......... Three months later, S&P's tone became sharper. It said there was a 50% chance it could downgrade U.S. debt within 90 days. Mr. Beers said this change was prompted by concern the debt ceiling might not be raised by Aug. 2 and because the debate had become "entangled."
If I have a huge, and steadily growing, cancer tumor, I wouldn't think of it as some 'helpful yet somehow controversial growth-inducing mechanism'. Hell no. I would immediately cut off its blood supply and eradicate it.
Moreover, the economy has been made addicted to the fake money from QE1 and QE2, and once the "drug" is pulled out, it will experience a sharp "cold turkey" shock coinciding with the financial burden of municipalities. People will panic -- game over.
All but one from the countries caught in 'the ring of fire' have chosen austerity measures. The U.S. have chosen the opposite path: print money and borrow from the future, “because you’re worth it”. This is an economic suicide.
Don't believe any optimistic predictions, especially from the Fed -- check out what Henry Paulson and Ben Bernanke deliberately said before the crisis here. Nothing has changed since the 2008 financial meltdown. Don't expect any specific warnings from Moody's and Fitch, as they haven't amended their rating policies after the crash in September 2008 -- they still can't see the forest for the trees.
Watch the derivatives market. It was the hub of the previous crisis, and will be the catalyst for the next one.
There's an old saying in Tennessee: Fool me once, shame on you; fool me twice, shame on me.
P.S. In case you have faith in the Fed Chairman, recall his promise that "the Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth" (Subprime mortgage lending and mitigating foreclosures, September 20, 2007). Six months earlier, he stated: "At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency. We will continue to monitor this situation closely" (The economic outlook, March 28, 2007).
A brief excerpt from the FCIC report (January 26, 2011):
p. xvii: "Now to our major findings and conclusions, which are based on the facts contained in this report: they are offered with the hope that lessons may be learned to help avoid future catastrophe.
• We conclude this financial crisis was avoidable. .......
p. xxviii: "The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again.
"The Fed not only wants to stimulate the economy but also to recapitalize the banks, and this is a stealth technique to do it," said Herbert M. Allison Jr., a former investment banker who has turned banking apostate in a new white paper called "The Megabanks Mess," published as a Kindle Single. The reason "banks aren't doing more lending is that they still hold a lot of troubled assets that tie up equity." On January 21, 2011, Alan Greenspan boldly admitted the need for 'currency board', which is nothing but the so-called 'Plan B' :
“We have at this particular stage a fiat money which is essentially money printed by a government and it's usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggests that inflation will take hold with very deleterious effects on economic activity.”
Detailed account with charts (home prices and bank lending) below.
The next FCIC report will conclude that the second financial crisis was "avoidable", if only the toxic legacy from the first crisis was duly removed, without bailing out the troubled banks and printing $12.8 trillion.
The lizard had to cut off its tale in October 2008. Time has run out.
D. Chakalov July 12, 2011
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Chairman Bernanke’s Press Conference
Transcript of Chairman Bernanke’s Press Conference April 27, 2011 http://www.federalreserve.gov/FOMCpresconf20110427.pdf p. 12: "Ultimately, if—if inflation persists or if inflation expectations begin to move, then there’s no substitute for action. We would have—we would have to respond. ...... p. 16: "Why not do more? Again, this was similar to the question I received earlier. The tradeoffs are getting—are getting less attractive at this point. Inflation has gotten higher. Inflation expectations are a bit higher. It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk. ...... p. 22: "So we anticipate that we will tighten at the right time and that we will thereby allow the recovery to continue and allow the economy to return to a more normal configuration, at the same time keeping inflation low and stable. ...... pp. 22-23: "QUESTION. Hugues Honoré, Agence France-Presse. Many of the commercial partners of the United States are very concerned about the evolution of your foreign exchange rate. If in one hypothetical case the dollar would sink to a terrible level which would harm very much the U.S. economy and the prospect for the global economy because it affects the confidence of so many people, would you consider changing your monetary policy in accordance to that threat?
"CHAIRMAN BERNANKE. Well, as I said earlier, we do believe that a strong and stable dollar is in the interest of the United States and is in the interest of the global economy. Our view is that the best thing we can do for the dollar is, first, to keep the purchasing power of the dollar strong by keeping inflation low and by creating a stronger economy through—through policies which support the recovery and, therefore, cause more capital inflows to the United States. So those are the kinds of policies I think that in the medium term will create the conditions for an appropriate and healthy level of the dollar.
"So I don’t think I really want to address a hypothetical which I really don’t anticipate, because I think that the policies that we are undertaking, notwithstanding short-term fluctuations, will lead to a strong and stable dollar in the medium term."
The Fed Chairman didn't answer the crucial question above, from Hugues Honoré.
Now, suppose you ask the U.S. Fire Administrator about the Fire-Safe America program, stressing the risk of a new fire around August 15th, and he says, 'Naah, I don’t think I really want to address a hypothetical which I really don’t anticipate, because I think that the policies that we are undertaking, notwithstanding some short-term fire-risk situations, will lead to a strong and stable Fire-Safe America in the medium term." And how would you react to such statement if the same Fire Administration didn't anticipate a devastating "fire" just three years ago?
Actually, the "fire" was identified in The Grace Commission Report in January 1984. It went wild on April 28, 2004. It is too late to stop it.
Is Ben Bernanke some totally irresponsible person? NO. Not at all. There is Plan B on the table. Or rather 'under the table', in case the official fiscal policy fails. Which is inevitable. The Fed can't invoke demand by just pumping the economy full of "stimulus" and lowering interest rates (the so-called liquidity trap): people are not "willing" to spend more, simply because they can't.
The U.S. economy is not healthy in principle, because the Wall Street and the main street belong to entirely disconnected worlds: the former enjoys the total socialism of 'too big to fail', while the latter is left to pay the bill. “Every year you’ve got more and more people getting on the government bill and more borrowing, and now we have less and less people paying in,” said Jason Gibson, 28, a truck driver from Romulus, Michigan. “You get too many people on one side of the ship, it’s going to tip.”
One nation, double standards. Yet Ben Bernanke keeps claiming that "we don't have a precise read as to why this slower pace of growth is persisting" (June 22, 2011). Well, maybe he is indeed clueless (which could explain the discrepancy between the expected 4% GDP growth and the actual 1.8%, as well as the rosy predictions for 2012). Point is, the Fed Chairman is not some totally irresponsible person, so he should have quietly prepared a Plan B, while boosting the perception at Wall Street of zero probability for a "sudden fiscal crisis" (cf. below) and avoiding questions about the fate of the dollar, like the one from Hugues Honoré.
Louise Story, business reporter for The New York Times, published a mind-boggling report in December 2010, entitled: 'A Secretive Banking Elite Rules Trading in Derivatives':
On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.
This is just one example of the double standards applied to the Wall Street and the main street. Recall the history of the Fed: in the evening of December 23, 1913, the Federal Reserve Act was voted in by 3 (three) members of the U.S. Senate. According to Wiki, the Fed nowadays involves "numerous privately owned U.S. member banks". Which are these private banks? In March 2009, Sen. Bernard Sanders asked the Fed Chairman a very simple question (01:19 - 01:20): Will you tell the American people which banks got $2.2 trillion of their dollars? Ben Bernanke replied: "NO."
Once you wind up with a secretive society of banks which run your money based on their profit, you’ve got a recipe for disaster.
See also: John B. Taylor, Testimony Before the Joint Economic Committee of the Congress of the United States, June 21, 2011
Though the recession officially ended two years ago this month, the unemployment rate is still unacceptably high at over 9 percent. The main reason for the high unemployment is that the recovery has been very weak, and it has been weak from the start, not just during this year. For example, Figure 1 compares GDP growth during this recovery with the recovery after the 1981-1982 recession. Economic growth in this recovery has averaged only 2.8 percent, compared with 7.0 percent in the comparable period in the 1980s.
In the area of fiscal policy we have seen an $862 billion stimulus package and a surge in federal spending from 19.7 percent of GDP in 2007 to over 24 percent now. These interventions had little or no effect in stimulating the economy or reducing unemployment. The stimulus payments to people did not jump-start consumption. The stimulus payments to the states did not increase infrastructure spending. The cash for clunkers program merely shifted consumption a few months forward. At the same time the deficit and the debt have exploded raising the risks of higher inflation, higher tax rates, higher interest rates and a major fiscal crisis—all impediments to private investment and job creation.
The timeline: at some point between the next FOMC meeting on 22 June 2011 and the end of August 2011, the Fed Chairman will have to acknowledge the raise of inflation "expectations" and fulfill his promise that "there’s no substitute for action." Firstly, the excessive liquidity that has flooded the financial markets after QE2 will have to be "regulated", and Ben Bernanke will embark into everything and anything in order to come out clean after the shits hit the fan ("sudden fiscal crisis," cf. below). He explicitly said the following (June 14, 2011):
The nation's long-term fiscal imbalances did not emerge overnight. To a significant extent, they are the result of an aging population and fast-rising health-care costs, both of which have been predicted for decades. ....... Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. Although historical experience and economic theory do not show the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory is moving the nation ever closer to that point.
Perhaps the most important thing for people to understand about the federal budget is that maintaining the status quo is not an option.
We, the people, have been warned: the U.S. economy remains in deep trouble. It's on record. Don't ever say you knew nothing about it.
Fact is, Ben Bernanke is not in charge of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). If they come out 'too little, too late', he's safe.
By the end of August 2011, the next proactive move by the Fed Chairman may be a historic announcement, along the following lines (just a sketch, in plain English):
Time is running out. We must immediately choose from two alternative options. The first option is very harsh, but the second one is unimaginably worse.
Therefore, we actually have only one way out from the upcoming financial crisis: devaluate our currency and move on with IMF toward the new world's reserve currency. Hence we will avoid defaulting on our national debt, and by sharing our problems with the whole world, we can minimize the shock on our economy.
P.S. It cannot be ruled out that Ben Bernanke may opt for the second option, although I think he is smart enough to explore the advantages from the first one. There isn't any third option: forty years have passed since Richard Nixon abolished the gold standard on August 15, 1971. The U.S. dollar is worn off as the world's reserve currency. It's a natural process. Don't blame Ben Bernanke, he's doing everything possible to keep the too-big-to-fail dancing while the Fed music is still playing... and of course won't tell you when he will shut down the party. Yes he can.
Seeking a New Haven By Matt Phillips, WSJ, July 18, 2011
Now, as the Aug. 2 debt-ceiling deadline approaches and ratings firms fire off warnings on the U.S. credit rating, some on Wall Street are wondering where investors might run should a worst-case scenario materialize.
Prices for gold also have traditionally risen during times of political, economic and market instability. Since the financial crisis struck in 2008, prices for the metal have soared. In 2010, gold prices jumped 30%. This year, they are up an additional 12%.
Let’s not all go and panic now. But it’s worth noting that the price of default insurance on U.S. debt seems to be burbling a bit higher today. For months, traders have been shrugging off the prospect that politicians in the U.S. would sit by and let the Aug. 2 deadline — imposed by the Treasury department — blow by.
Here’s a look at the price of five-year CDS default insurance in the U.S. over the last year, breaking out to some new highs this morning.
............
The Painful Consequences of a Debt Ceiling Increase By Larry D. Spears, Money Morning, July 18, 2011
After all, even if the Republicans in Congress back down and allow some federal tax increases, there's no way those being discussed will be enough to cover the increased debt burden - or even the increased interest payments, for that matter.
The only way the U.S. can pay the increased interest - forget about principal - is to print more money. That means a weaker, devalued dollar, and higher prices for everything priced in dollars.
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Inside the Disappointing Comeback By Jon Hilsenrath and Conor Dougherty, WSJ, July 5, 2011
Banks are less able or willing to lend than before the recession. Since the recovery started, banks have reduced money they make available through credit card lines from $3.04 trillion to $2.69 trillion and have reduced home equity credit lines from $1.33 trillion to $1.15 trillion, according to the Federal Reserve Bank of New York.
Two rounds of quantitative easing that including purchasing $1.425 trillion in mortgage bonds and $900 billion in Treasury debt helped to stabilize the economy but failed to spur a vigorous recovery.
The biggest problem may be household indebtedness. At the peak of the economic boom in the third quarter of 2007, U.S. households collectively had borrowed the equivalent of 127% of their annual incomes to fund purchases of homes, cars and other goods, up from an average of 84% in the 1990s. The money used to pay off that debt means less available for new spending. Households had worked their debt-to-income levels down to 112% by the first quarter, in part because banks have written off some debt as uncollectible.
Getting rid of debt could be a long and slow process. To get back to a 1990s debt-to-income ratio of 84%, households would either need to pay down another $3.3 trillion of debt, or see their incomes rise $3.9 trillion. That's equivalent to about nine years' worth of income growth in normal times, estimates Credit Suisse economist Dana Saporta.
Debt and a dismal job market have hurt consumers' confidence, which further damps their willingness to spend. The University of Michigan finds that 24% of households expect to be better off financially within a year's time. That's the lowest this measure has been at this point in a recovery since World War II.
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The Budgetary Game Is a Taxpayer Scam By Larry Kudlow, CNBC, 7 July 2011
At the end of the day, the only thing that really matters is next year's budget. Will it be cut? Ever in my lifetime? Because if it were cut, it would bring that line in that chart above down. Now that would be a called a decline. All of that other stuff? Increases.
When business cut expenses, the spending line declines. But when government cuts spending, the spending line always rises. Think of it.
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Muni Bonds: Will New Worries Spread?
By Jonnelle Marte and Elizabeth O’Brien, SmartMoney Blogs,
October 12, 2011
Ratings agencies are doing
more “super downgrades,” in which muni bond issues are downgraded by three
notches or more. There were nine such downgrades in September compared to
four in August, according to Municipal Market Advisors. And Moody’s ratio of
downgrades to upgrades was 12 to 1 in September.
............
Capital Files for Bankruptcy
In Fight With State, Harrisburg, Pa., Rejects Governor-Backed Plan to Sell
Assets
By Michael Corkery and Kris Maher, WSJ,
October 13, 2011
Pennsylvania lawmakers were expected to pass legislation next week that
essentially would amount to a state takeover of the city's financial
recovery plan. But late Tuesday, a divided Harrisburg city council voted to
file for Chapter 9 bankruptcy protection, becoming the second city to file
this year.
The filing comes amid tensions between city officials and state lawmakers,
who draw much of their power base from the suburbs. To raise revenue, some
Harrisburg officials want to impose a tax on commuters into the city from
the surrounding suburbs.
For decades cities have avoided the idea of bankruptcy for fear of ruining
their standing among bond investors. But legal experts say more cities are
likely to use it as a way to seek concessions.
In Jefferson County, Ala., officials last month used the threat of
bankruptcy to wrest more than $1 billion in concessions from debt
holders, an unprecedented haircut in the municipal-debt market.
In August, Central Falls, R.I.
filed for bankruptcy protection after retired city workers refused to
accept an offer to cut their pensions.
............
Pennsylvania capital files for
bankruptcy
By Nicole Bullock, FT,
October 12, 2011
On Wednesday, questions were being raised as to the legality of Harrisburg’s
filing and analysts expected the state to try to block it. The courts can
also dismiss Chapter 9 bankruptcy filings.
Bankruptcy and default are rare for local governments in the US. Some
observers have predicted an increase in the wake of the US recession,
raising concerns about potential losses in the US municipal bond market
where they raise money. States, like countries, cannot file for
bankruptcy.
This year, Central Falls, Rhode Island, filed for bankruptcy and Jefferson
County, home to the city of Birmingham in Alabama, repeatedly threatened
bankruptcy, but has agreed on a tentative settlement with its creditors.
California to retire $7.75 billion of muni debt that paid lucrative yield to investors By Tom Petruno, LA Times,June 27, 2011
When the notes were issued in November, the municipal bond market was in the midst of a brutal sell-off that would extend through mid-January. As investors fled the muni market, Lockyer was forced to boost interest rates on the notes to get the deal done.
Yields are falling on muni bonds in general as the market continues to recover from the autumn and winter sell-off. The supply of new bonds has been slashed as many states and municipalities have curtailed borrowing.
As for shorter-term muni debt, a number of California cities, counties and school districts sell their own versions of short-term revenue anticipation notes at this time of year. But those securities are yielding far less than the 1.75% peak rate the state had to pay.
Joe Lee, a muni bond trader at De La Rosa & Co., said annualized yields on the new crop of notes from municipalities in the state typically are in the range of just 0.2% to 0.3%.
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Indebted Illinois Stiffs Creditors From Funeral Homes to Xerox By Tim Jones and Melissa Silverberg, Bloomberg, June 24, 2011
In Illinois, you’re never too big or too small to get stiffed by the state, which is $4 billion behind in its bills.
While states periodically fall behind in paying Medicaid providers or, in the case of California, rely on bank loans and IOUs, the Illinois backlog has been growing for three years. It’s forcing some vendors to fire workers, cut services and, if they can, obtain loans and lines of credit to keep their businesses going while the state takes months to pay.
“An Illinois phenomenon,” said Ron Ford, CEO of Chicago- based Help at Home Inc., which is owed $43.4 million and hasn’t heard from the state since December.
Creditors include health and education agencies, schools, charities, funeral homes, plumbing-and-heating contractors and purveyors of food, coal, clothing, electronics and pizza.
Deadbeat State
“Banks have refused us a line of credit because of the state,” said David Baker, who runs the nonprofit Open Door Rehabilitation Center in Sandwich, Illinois, and is owed $880,000. “We’ve had a long-time relationship with bankers, but now they wonder ‘What if the state never pays you?’”
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Meredith Whitney: New Jersey's $2.5B Loan Tue 28 Jun 11 | 08:09 AM ET
New Jersey Seeks Loan To Plug Cash Shortfall By Michael Corkery, WSJ, June 28, 2011
In a move highlighting the severe fiscal stress facing many states, New Jersey officials have been negotiating a temporary bank loan of as much as $2.25 billion to plug a cash shortfall, according to people familiar with the matter. The loan would cover bills the state will need to pay as its new fiscal year begins July 1. Normally, states have some cash available as they finish one fiscal year and begin the next, while gearing up for a bond offering based on the new budget.
It can take up to two months to prepare the necessary documentation for a bond offering once a budget is set for the coming fiscal year, while the state's cash crunch is likely to occur in the next few weeks, one of the people said.
Fitch Ratings would move its ratings on the U.S. to restrictive default if the sovereign fails to raise its debt ceiling and misses a coupon payment on Aug. 15 as a result, a senior official at the credit rating agency said Tuesday.
In a speech in Singapore, Andrew Colquhoun, Fitch's head of Asia-Pacific sovereign ratings, said he believed it was highly likely that the debt ceiling would be raised in time, and that a default would be avoided.
However, "if we reach Aug. 2 without the lifting of the debt ceiling, Fitch will assign a rating watch negative to the U.S. sovereign rating," Mr. Colquhoun said.
"On Aug. 15, the U.S. faces $25 billion of coupon payments on $4 trillion of the U.S. sovereign debt. If the debt ceiling has not been raised and the U.S. is not able to meet that payment, then the U.S. ratings will be moved to restrictive default," he said.
While that default is likely to be cleared promptly, "it's highly unlikely after such a default that the (U.S.) rating would move back to triple-A," he noted.
What happens if we crash into the debt ceiling? Nobody really knows, but it's not likely to be pretty. Inflows and outflows of cash to and from the Treasury jump around from day to day as bills are paid and revenues arrive. But at average fiscal 2011 rates, receipts cover only about 60% of expenditures. So if we hit the borrowing wall traveling at full speed, the U.S. government's total outlays—a complex amalgam that includes everything from Social Security benefits to soldiers' pay to interest on the national debt—will have to drop by about 40% immediately.
How in the world do you do that? No one really knows. If and when the time comes, Mr. Geithner and his boss will have to decide. But here's one prediction: Defaulting on the national debt will not be their first choice. After all, the statue of Alexander Hamilton at the Treasury entrance reminds Mr. Geithner every day of the importance of maintaining the nation's creditworthiness.
Even if we hit the debt ceiling, maturing obligations still can be rolled over. And I'll bet he will bend every effort to make the interest payments, too. Unfortunately, however, when you're 40% short, not much can be ruled out.
The bills for Social Security, Medicare, Medicaid, national defense and interest on the debt comprise about two-thirds of all federal outlays. So they can't all be sacrosanct indefinitely. At some point, Mr. Geithner could wind up brooding over horrible questions like these: Do we stop issuing checks for Social Security benefits, or for soldiers' pay, or for interest payments to the Chinese government? Such agonizing choices are what make default imaginable.
The U.S. dollar would be among the first casualties. If hot money were to flee what was once its safest haven, the dollar would sink and U.S. interest rates would rise. The latter could lead us back into recession.
There would also be lasting costs to the U.S. government in the form of higher interest rates. For as long as anyone can remember, the full faith and credit of the United States has been as good as gold—no one has better credit. But if investors start to see default as part of U.S. political gamesmanship, they will demand compensation for this novel risk.
How much? Again, no one can know. But even if it's as little as 10-20 basis points on the U.S. government's average borrowing cost, that's an additional $10 billion to $20 billion in interest expenses every year. Seems like an expensive way to score a political point.
That said, outright default is not my main concern. Several other things are:
For openers, suppose the federal government actually does reduce its expenditures by 40% overnight. That translates to roughly $1.5 trillion at annual rates, or about 10% of GDP. That's an enormous fiscal contraction for any economy to withstand, never mind one in a sluggish recovery with 9% unemployment. Even contemplating such a possibility is evidence of a dark, self-destructive impulse.
Second, markets now assign essentially zero probability to the U.S. losing its fiscal mind. They'd be caught flat-footed if the threat of default suddenly started to look real, possibly triggering a world-wide financial panic. Remember how markets reacted to the Lehman Brothers surprise? As Mr. Geithner pointed out in New York on Tuesday, "As we saw in the fall of 2008, when confidence turns, it can turn with brutal force and with a momentum that is very difficult and costly to arrest."
And finally, as mentioned, should the view take hold that threats to default are now a permissible weapon of political combat in the world's greatest democracy, U.S. government debt will lose its exalted status as the safest asset money can buy—with unpleasant consequences for the dollar and interest rates.
Fights over the budget are normal and proper in a democracy, especially when the two parties hold dramatically different views. But threatening to default should not be a partisan issue. In view of all the hazards it entails, one wonders why any responsible person would even flirt with the idea.
pp. 473-474: Everyone recognizes that the Fed’s quantitative easing operations have created a veritable mountain of excess reserves (shown in Figure 3), which U.S. banks are currently holding voluntarily, despite the paltry rates paid by the Fed. The question is this: How urgent is it—or will it become—to whittle this mountain down to size?
One view sees all those excess reserves as potential financial kindling that will prove inflationary unless withdrawn from the system as financial conditions normalize. (footnote 22)
We know that under normal circumstances—before interest was paid on reserves—banks’ demand for excess reserves was virtually zero. But now that reserves earn interest, say at rate z, which the Fed sets, banks probably will not want to reduce their reserves all the way back to zero.
There is a broad consensus for $4 trillion to $5 trillion in savings over the coming decade, though Geithner cautioned that could not come entirely from spending cuts.
"We're meeting every day the remainder of this week. We're making a lot of progress in fleshing out the shape of a down payment with this broader framework of constraints--a debt cap and enforcement mechanisms. We're getting closer but we need to make some progress this week," Geithner said.
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Former Federal Reserve Governor Laurence Meyer: "Back-loaded and credible are oxymorons. Clearly, it's a challenge."
"If fundamental changes are not made in Federal spending, as compared with the fiscal 1983 deficit of $195 billion, a deficit of over ten times that amount, $2 trillion, is projected for the year 2000, only 17 years from now. In that year, the Federal debt would be $13.0 trillion ($160,000 per current taxpayer) and the interest alone on the debt would be $1.5 trillion per year ($18,500 per year per current taxpayer)."
Twenty-eight years after The Grace Commission Report: According to the Congressional Budget Office, the financial crisis will end up increasing government debt by at least 40 percent of GDP (Simon Johnson). Currently, it is estimated around 10 per cent. Check out Bill Gross below.
-------------------
Is the future bright? Details from Lakshman Achuthan, June 13, 2011.
Gross spoke following a report that US banks were likely to scale back on their use of Treasurys as collateral against derivatives and other transactions. Bank heads say that move is likely to happen in August as Congress dithers over whether to raise the nation's debt ceiling, according to a report in the Financial Times.
The move reflects increasing concern from the financial community over whether the US is capable of a political solution to its burgeoning debt and deficit problems.
"We've always wondered who will buy Treasurys after the Federal Reserve purchases the last of its $600 billion to end the second leg of its quantitative easing program later this month, Gross said. "It's certainly not Pimco and it's probably not the bond funds of the world."
Pimco, based in Newport Beach, Calif., manages more than $1.2 trillion in assets and runs the largest bond fund in the world.
Dr. Olivier Blanchard pictured the financial problems in the U.S. as "a bump in the road rather than something more worrisome," and expects some "convincing medium term fiscal consolidation plan".
Meanwhile PIMCO's Bill Gross, responsible for the largest bond fund in the world with more than $1.2 trillion in assets, advised investors to flee the country: "You must get out of the United States ... 10, 20, 30 years from now" (Opening Keynote Speech, 2011 Morningstar Investment Conference, Chicago, June 8, 2011),
News this week that the CIA is building a secret military base in the Middle East had the committee buzzing with excitement. One judge noted, “We applaud Obama for presiding over 865 military bases abroad at a cost of over $102 billion annually. At a time when the country is faltering from the economic crisis, Obama’s decision to approve the construction of more bases deserves praise.”
------------------------ US Biggest Banks to Cut Back on Treasurys Use in August By Michael Mackenzie and Aline van Duyn, FT Sunday, 12 Jun 2011 | 7:51 PM ET http://www.cnbc.com/id/43373772
"We’re planning to lower our reliance on the use of Treasurys in early August and have more cash on hand as a contingency measure," said a U.S. bank chief.
Investors worldwide own large amounts of the $9.7 trillion of debt that has been sold by the U.S. government as part of their portfolios. But nearly 40 per cent of the existing U.S. Treasury debt — about $4 trillion — is used to back deals in the repurchase, futures and swaps markets, say JP Morgan Chase estimates.
It is this key role that Treasurys play as collateral for the wider financial system where turmoil could follow any missed payment resulting from the debt ceiling fight.
U.S. regulators (...) agreed to delay a host of new requirements scheduled to hit the $600 trillion derivatives market next month. ......
The delay comes amid wrangling over a financial-regulatory landscape that is in some ways largely unchanged since the 2008 financial crisis. Regulators are so mired by the process of writing rules triggered by Dodd-Frank that some of the most vulnerable areas of the financial system haven't been addressed.
Derivatives are especially controversial because critics say they encouraged huge risk-taking and spread damage far and wide during the crisis. American International Group Inc. and Lehman Brothers Holdings Inc. were among companies battered by derivatives bets. ......
Regulators are making progress in other areas, such as proposing rules that require banks to hold onto some of the risk from mortgage-backed securities. Banks have boosted capital levels beyond pre-crisis levels, giving them a bigger cushion. But new rules for a much longer list of problems that helped fuel the financial crisis still are up in the air.
The CFTC has been at the apex of concerns because rules it is writing are central to the functioning of financial markets.
The CFTC and the Securities and Exchange Commission were supposed to finish rules creating a new regulatory framework for trading and clearing derivatives by July 21, the anniversary of the law's signing. The majority won't be complete by then. ......
The financial-services industry has taken some steps to curb risk taking, with firms such as Goldman Sachs Group Inc. jettisoning their proprietary-trading desks in advance of federal rules requiring such a move. Banks have also boosted capital levels well beyond pre-crisis levels, although regulators are expected to propose even tougher capital buffers later this summer that set a minimum capital level for depository institutions.
------------ Jamie Dimon's Faulty Capital Requirement Math By Simon Johnson, June 9, 2011
According to Sanjai Bhagat and Brian Bolton, executives at the top 14 U.S. financial companies pocketed about $2.6 billion in cash (salary, bonus and the value of stock options sold) during 2000-2008. Much of that compensation would not have been paid if there were proper adjustment for risk.
Total Crisis Costs
The realized downside risks, as handed to the taxpayer, should be measured not merely as the cost of the Troubled Asset Relief Program (TARP) or Federal Reserve rescue plans, but in terms of the increase in federal-government debt the financial crisis caused. According to the Congressional Budget Office, the financial crisis will end up increasing government debt by at least 40 percent of gross domestic product. (I’ve covered the details of this calculation elsewhere; this point is not controversial among fiscal experts.)
So, to turn Dimon’s question around, we know that previously low capital requirements led to social losses (those borne by taxpayers) in the trillions of dollars, as well as millions of jobs and homes lost, while the private gains were in the low billions.
Two and a half years after the crash, Wall Street ought to be feeling pleased with itself. It lost billions of dollars, devastating the world’s economy in the process, the federal government had to put up $700 billion of taxpayers’ money to prevent an even worse disaster, and otherwise reasonable politicians began using epithets like “fat cats” and “robber barons” for the first time in decades. And yet now the financiers are firmly back in business. Bonuses are flowing again—JPMorgan Chase CEO Jamie Dimon got a 51 percent raise in 2010, to $23 million—and Bernie Madoff is the only chief executive to end up in jail. It’s almost as if nothing had happened.
“No one has laid a glove on them,” says Janet Tavakoli, a derivatives expert. “There was massive fraud, and nothing was done. If you are a banker, you are slapping high fives at the moment.” .......
The banks that survived 2008 didn’t even do so badly in the aftermath. Helped by Treasury and Federal Reserve support in the form of very low interest rates and asset guarantees, Wall Street made profits of $61 billion in 2009 and paid $22.5 billion in bonuses.
Then, in 2010, profits dropped by half, to $27 billion, and the mood is correspondingly deflated. It’s still awaiting (and lobbying fiercely against) a wave of new regulations, both from the central bankers who meet in Basel and from Congress, in the form of the Dodd-Frank bill. The latter passed last year but includes a huge number of new rules that are yet to be drafted in detail by regulators such as the SEC.
Despite unleashing havoc on the global economy, Wall Street is once again getting ready to pay astronomical bonuses this year. The nation’s six largest banks alone are on track to pay their bankers a staggering $143 billion in bonuses, benefits and compensation (“bonus and compensation”), more than enough to fill the $130 billion total budget gap for all 50 states in FY 2011. If Wall Street pumped this money directly into the economy instead of paying it to its bankers, it could create 3.6 million new jobs, and lower the unemployment rate by 2.3 percent. Bank of America tops the list, with $35 billion in bonuses and compensation set aside for its bankers.
TABLE 1: Bonuses and Compensation at the Top Six Banks (2010)
.......
Five million families have lost their homes to foreclosure thus far during the financial crisis. Nine million are expected to go into foreclosure between 2009 and 2012.7 The foreclosure epidemic is no longer confined to just subprime borrowers or those at the fringes of the economy. As housing values continue to plummet and long-term unemployment becomes the norm, middleclass families with prime mortgages are becoming the new faces of foreclosure. With record unemployment and nearly a quarter of American homeowners under water with their mortgages, working families are losing their homes in record numbers.
Experts agree the most effective way to stop the tsunami of foreclosures is through permanent, sustainable loan modifications that reduce homeowners’ mortgage principal and interest rates to market value. Across the country, some 11 million homeowners are $766 billion under water with their mortgages. That means they owe $766 billionmore on their mortgages than their homes are worth. If the banks were to write down their principals to market value and to refinance them into 30-year, fixed-rate loans at market interest rates, it would pump $73 billion into the American economy every year for the next 30 years. Over the life of the new loans, it would save Americans more than $2 trillion monthly mortgage payments.
Homeowners could use this $73 billion to increase spending, invest in their small businesses and help turn the economy around. It would be a $73 billion annual stimulus, at no cost to taxpayers.
----------------
US: When timing is all By Robin Harding, FT Published: April 19 2011 23:39 | Last updated: April 19 2011 23:39
Exit strategy is the monetary economist’s equivalent of picking a fantasy baseball team or debating what Kate Middleton will wear for the royal wedding: there are enough options and complexities for everybody to have an opinion. ......
Still, with easing drawing to an end, it is natural to revisit exit plans. Most officials still endorse the basic sequence discussed last year: first, scrap the promise of ultra-low rates for an “extended period”, then drain reserves out of the banking system, raise short-term rates and only after that begin sales from the asset portfolio.
Having an extra $600bn of Treasury securities as a result of the current round of asset purchases does, however, make a few differences. First, it will take longer to get rid of all of the Fed’s QE assets. For example, if disposals ran at $100bn a quarter, it would take an extra year and a half to get rid of the $600bn.
The red question mark denotes the critical $1,800 gold price
------------------------
Ben Bernanke, June 7, 2011: "As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term. Should that forecast prove wrong, however, and particularly if signs were to emerge that inflation was becoming more broadly based or that longer-term inflation expectations were becoming less well anchored, the Committee would respond as necessary."
Martin Hutchinson, June 8, 2011: "The stock market will crash and a surge in real interest rates combined with the plunge in asset prices will prompt bankruptcies to spike." Martin Feldstein, June 8, 2011: "The drop in GDP growth to just 1.8% in the first quarter of 2011, from 3.1% in the final quarter of last year, understates the extent of the decline. Two-thirds of that 1.8% went into business inventories rather than sales to consumers or other final buyers. This means that final sales growth was at an annual rate of just 0.6% and the actual quarterly increase was just 0.15% — dangerously close to no rise at all. A sustained expansion cannot be built on inventory investment. It takes final sales to induce businesses to hire and to invest.
"The picture is even gloomier if we look in more detail. (...) The data for May are beginning to arrive and are even worse than April's. They are marked by a collapse in payroll-employment gains; a higher unemployment rate; manufacturers' reports of slower orders and production; weak chain-store sales; and a sharp drop in consumer confidence."
Fitch adds voice to concerns over Washington debt By James Politi, FT Published: June 8 2011 22:05 | Last updated: June 8 2011 22:36
“Failure to raise the debt ceiling in a timely manner would imply a crisis of governance that could imperil the US’s triple-A status,” said David Riley, head of sovereign ratings at Fitch. “More importantly, default by the world’s largest borrower and issuer of the pre-eminent reserve currency would be extraordinary and threaten the still fragile financial stability in the US and the world as a whole.”
For the record: On 5 January 2011, I stated in my email to IMF that the collapse of U.S. dollar can happen "by the end of May 2011," and stressed that such events should be modeled with René Thom's Catastrophe Theory. The reason is dead simple: too much fake money. The most likely event to trigger the crash is panic, as it can develop literally within hours -- recall the electronic bank run on Thursday, September 18, 2008 (Paul Kanjorski). It was caused by people's perception of 'not enough safe money in the banks'.
But 'too much fake money', even if they are "totally safe", is actually much worse. Once people panic, there's no way back: the U.S. Treasury won't be able to calm them down by injecting even more fake money. This time, the panic will be unstoppable. It will spread on everything.
When it rains, it pours (祸不单行, as folks say in China). And then comes Plan B.
In the present circumstances (cf. the two charts below), the domino effect from panic may be triggered by municipal bond crisis (cf. Shah Gilani below). People are veryuptight and nervous -- "we have four months left" (Bill Gross) to find out the effect from the Keynesian experiment known as "QE2". Q: Who will absorb the low-yield, $500 billion U.S. Treasury supply after the end of QE2?
In such highly volatile conditions, a mini-bond crisis can trigger the crash of USD. It can literally explode within hours due to the accumulated panic.
The Fed's Treasury Monetization Is A Huge Game Of Chicken Russ Winter, The Wall Street Examiner | Apr. 8, 2011, 11:06 AM
"The question now: When does the meltup switch into a full-fledged meltdown of the global economy? In spite of all warning signs that the Fed has ignored over the past few months, the switchover is now transmitting at such a rapid pace that it could happen in either one great shock or in a series of tsunamis."
Did you expect in January 2011 that companies like PIMCO may soon dump treasuries? If you didn't, perhaps you should adjust your 'strategic thinking' in line with Plan B.
Mohamed El-Erian, February 22, 2011: "It is a warning shot to America that we cannot simply assume flight to quality, flight to safety. That people are starting to worry about the fiscal situation in the U.S. They are starting to worry about the level of debt. They are starting to worry about what they hear about states and municipalities. So, I would take this as a warning shot that we cannot assume that we will maintain the standing of the reserve currency as we have in the past."
“The dollar has only gone up like a rocket just prior to serious market declines. Notice what happened to the S&P 500 Index CME:Index and Options Market: SPX shortly after the dollar began a strong advance in August of 2008 ("the inflection point is upon us," Jack Barnes, May 10, 2011 - D.C.). It wasn’t but a few weeks later that the equity market collapsed. The early strengthening of the dollar was merely the canary in the mine that should have signaled a clarion call that the equity market was getting into trouble.”
Example: Japan. "Nobody could have possible predicted that the Japanese economy would literally fall off a cliff in Q1, plunging at a 3.7% rate (down from -3% previously), which is double the consensus print of -1.9%. DOUBLE. And in nominal terms the collapse was simply epic: -5.2%! And yes, this is officially a recession. (...) It means that the BOJ will be forced to print a few hundred trillion in Yen asap" (Tyler Durden, May 18, 2011). Yet the Nikkei is up.
There is enormous tension due to the total uncertainty about what will happen after Ben Bernanke raises interest rates and drives the economy toward "a smooth and effective exit at the appropriate time." Such "exit" is mandatory and inevitable (cf. pushing on a string), but the unimaginable consequences will fuel the panic of these people, up to the critical bifurcation point.
How would you feel is someone tells you that you absolutely have to jump from a cliff tomorrow morning at 11AM, but everything will be just fine, because it will be a 'smooth and effective exit' predicted from a well-designed monetary policy? You will panic well before "the jump" at the end of June this year. Worst of all, your panic makes 'the cliff' far more dangerous.
It is like a tsunami fueled by panic. All of this could have been prevented, according to Jim Rogers.
We would have been like surfers waiting for the tide -- no big deal, it will come and go. It is too late now. It does not matter anymore whether there will be QE3 after June 2011, or not. In a nutshell:
1. The ratio of monetary cash base to GDP, and the "monetazation" of national debt (recall the Weimar Republic), are particularly devastating trends, given the decline of GDP in the January-March period to an annual rate of only 1.8 per cent, compared with 3.1 per cent in the last quarter of 2010; details here. "The dollar has dropped 5.8% against the world's major currencies in 2011, its worst start to a year since 1995. (...) The deficit is expected to hit 10.4% of gross domestic product in 2011, according to the International Monetary Fund" (source here). Ben Bernanke declared that "most of the slowdown in the first quarter is viewed by the committee as being transitory." The fact of the matter is that inflation is rising, and QE1 and QE2 didn't boost the economy and the housing market. Don't blame the weather. Watch Glenn Beck.
2. Interest rates cannot be raised: check out "The Death of the Dollar", by Martin Hutchinson, April 26, 2011, and the dependence of those too-big-to-fail banks on derivatives, by Graham Summers, February 8, 2011. 3. The Fed cannot purchase U.S. Treasurys indefinitely; to understand how the Fed works, watch MSNBC Morning Meeting, Friday, July 24, 2009. The legal limit to borrow was reached on May 18th. QE3 is out of question. Apart from Mark Gongloff (May 9, 2011), nobody knows who will purchase those pink pieces of paper (called U.S. Treasury bonds) in the second half of 2011.
The next recession in the U.S. is "years away," Jan Hatzius, the chief economist of Goldman Sachs, predicted on 17 May 2011 (watch global commodity prices, Shah Gilani, May 18, 2011). As the chief economist of Goldman Sachs acknowledged in 2008: “I simply underestimated the violence of the process.”
The same game was played three years ago on CNBC:
Jim Cramer: "Bear Stearns is fine. Bear Stearns is not in trouble. Don't be silly... don't move your money."
Will Treasurys Get Boost from QE2 End? Don't Be Silly... Silver was $17.30 in March 2008, now is $38.50 and rising... Where are you gonna go?
4.China is preparing to raise the Yuan (the annualized month-on-month pace of appreciation for the Chinese currency against the U.S. dollar hit 10.6% in April, from 3.4% in March; source here), and lead the transition to the new world's reserve currency. They follow the Tao of Shao Yong. (English translation: 3.04 trillion U.S. dollars, as of March 2011, is far too much; "1 trillion U.S. dollars would be sufficient.")
Look at the ratio of 'volume of rice' to 'volume of empty glass container' below:
The next 'glass container' (U.S. Treasury supply), after the end of QE2, will be much larger.
China is persistently cutting back its "rice", so we expect the ratio of 'rice' to 'empty space' to be even more devastating after the end of QE2. It's all business, nothing personal. Details from Porter Stansberry here.
Under these perpetuating conditions, any shock from the mini-bond market can crash the bond market and trigger inflation. Or crash the over-valuated stock market -- "it could be enough to spill the Dow down toward 4,000" (Martin Hutchinson) -- and trigger inflation. Whichever comes first, the end result is the same. People will panic. Game over.
The U.S. dollar will collapse by the end of August this year, at the latest. Then we'll have to move to the new world's reserve currency:Plan B. It is inevitable. Watch Jane D'Arista explaining the so-called global clearinghouse (after John Maynard Keynes), 04:44 - 07:40.
Paul Farrell, from MarketWatch.com, cries out: "Our financial system is destroying us from within, stop it now," and "we need a leader like Bill Gross at this crucial turning point in our history, before it’s too late."
Sorry, it’s too late. Besides, Ben Bernanke is not some evil guy, trying to crash the U.S. economy. He simply does not have any choice. None. He couldn't, for example, admit that the inflation is 'structural', but was forced to make the unsustainable claim that it were "transitory". He simply can't (yet) tell the truth. It's too early to execute Plan B.
The problem is that the devaluated U.S. dollar cannot be embedded into the new world's reserve currency smoothly, without a sharp and devastating shock. This process began on August 15, 1971, after Richard Nixon ended the 'gold standard' (the Bretton Woods International Monetary System). Forty years later, the U.S. dollar cannot maintain its status of world's reserve currency anymore. It's worn off.
Again, this is a natural process. Which is why I suggested the Thaler, to avoid any global fiat currency, world's bank and world's government, and the horrible bloody wars that will follow.
If the reader experiences some form of cognitive dissonance, a possible remedy is offered here.
I will update this section of my 9/11 web page on August 31, 2011.
Please watch the latest video blog by Peter Schiff from June 1, 2011: he is also predicting the crash of USD, but with two very important differences -- (i) no precise timing and (ii) no word of caution, not even a hint about Bernanke's Plan B. Go ahead, watch it all.
Regrettably, Peter Schiff has never replied to my numerous email messages, and I have no idea why he never mentioned the only possible endgame for Ben Bernanke: with Plan B you can keep the picture below.
I predicted that the U.S. dollar will collapse by the end of August 2011, "at the latest". My prediction was wrong regarding the timing. Regrettably, it may take many more months to follow the spell from Winston Churchill: America invariably does the right thing, after having exhausted every other alternative.
Instead of curing the U.S. economy at its early stage of stagflation, people will try everything and anything to postpone the 'medicine'. The longer they procrastinate, the worse. Pity nobody cares.
Anyway. Let's go back to René Thom's Catastrophe Theory. Are you surprised from the public unrest in Egypt? Even with the benefit of hindsight, you still cannot connect the dots. That's Catastrophe Theory in action: sharp amplification of conditions which you thought were fully predictable and kept under control.
Recall the May 6 Flash Crash: according to Jeff Cox, "it was a lack of liquidity during the flash crash that spread in seconds around the market and dropped stock indices so quickly, and a return of liquidity that helped mitigate the damage."
Ready for 'Splash Crash,' the Ultimate Market Meltdown? By Jeff Cox. 3 Feb 2011 | 1:47 PM ET http://www.cnbc.com/id/41408510
You may experience the same 'total surprise' after the explosive meltdown of U.S. dollar, triggered by a panic in the bond market.
The municipal bond defaults are inevitable: watch Shah Gilani (03:47-04:10) and Peter Schiff. Warren Buffett set the stage on June 2, 2010 (0:20-0:38):
When will the Fed back up the municipal bonds to AAA status (Warren Buffett)? When pigs fly.
The immediate, under-the-radar problem for the municipal-bond market is that borrowers relied on banks to backstop their credits and lower short-term funding costs when the credit crisis shut the door on auction-rate preferred financing.
While most municipal borrowings are long term in nature, issuers still have short-term obligations that need to be rolled over. And while most of the states' ratings remained intact during the crisis, investors demanded higher interest on the money they were loaning to even the strongest borrowers. To keep borrowing costs from soaring, municipal borrowers sought big bank letters of credit (LC) as backstop guarantees on the shorter- than- they- wanted variable-rate- demand obligations that they turned to.
According to Bank of America Merrill Lynch (NYSE: BAC), $109 billion worth of different kinds of credit backstops and guarantees will be expiring in 2011. Thomson Reuters estimates that $53 billion of those guarantees are bank letters of credit. .... If short-term funding dries up along with desperately needed backstopping guarantees, borrowing costs for muni-bond issuers will rise and could trigger a cascade of events from downgrades to defaults.
It won't be a Black Swan event -- watch Meredith Whitney. It won't evolve from "the unknown unknown" (Donald Rumsfeld), but from what we already know about U.S. dollar, after the Federal Reserve Act was voted in by 3 (three) members of the U.S. Senate on December 23, 1913.
Peter Schiff Report, May 13, 2011 Market correction, inflation, gold standard
More from Sen. Tom Coburn, December 26, 2010. Once you allow money created from 'thin air' to be poured indefinitely into U.S. economy, the price you pay for gold, oil, and agricultural commodities -- the real stuff -- will grow, and the longer you keep interest rates ridiculously low (cf. Graham Summers below), the bigger the bubble you create. It will burst literally 'within hours', causing an explosive meltdown of U.S. dollar.
The Captain of Titanic is fully aware of the iceberg, yet he claims the ship is moving ahead quite well -- let the music play, there is plenty of time for another dance. (Exact quote from Ben Bernanke: "We have all the tools we need" for "a smooth and effective exit at the appropriate time.") How grotesque. Check out Meredith Whitney's forecast below.
In summary, "If your money is in bonds - whether those bonds are U.S. Treasuries, municipals or corporates - move it somewhere else" (Martin Hutchinson, February 9, 2011).
Don't procrastinate, because by the time you see Meredith Whitney again on CBS 60 minutes reminding you 'I told you so', it will be too late.
D. Chakalov February 5, 2011 Last updated: September 11, 2011, 14:34:30 GMT (time stamp from .PDF file)
Meredith Whitney, 06:18 - 07:57: “States have been spending at two-and-a-half times their tax receipts and that is going to be exaggerated when [federal] stimulus ends next month.
“What will happen is the states are cutting off aid to their local governments, which rely on them for over a third of their monies. Ohio has just cut off 25% of its aid to local governments and that’s prolific across all the states.
“The local municipalities have nowhere to go and their bias is to save their constituents before they save their bondholders. It’s an issue of willingness [to pay creditors] and ability, but I would say that willingness then trumps ability.”
"Bank analyst Meredith Whitney last year made a controversial call that "hundreds of billions of dollars" of munis would go bad. That helped tank the market. Nothing yet looks remotely on track for that kind of disaster. There are less than $10 billion of defaulted bonds outstanding - with just $28 million of those coming from the safest instruments like bonds backed by a U.S. state, according to Municipal Market Advisors.
"Admittedly, though, another $22 billion of bonds are showing signs of stress. That bears watching, especially if the U.S. economy sputters again. (...)
"Then there's demand. Outflows from muni bond mutual funds have slowed. They are running around $1 billion a week, according to mutual fund tracker Lipper.
"That's less than half the amount exiting earlier this year, and the aggregate outflow of nearly $50 billion since mid-November is only about a third of the inflow seen between 2008 and late 2010. (...)
"Though the market seems stable for now, the state finances of the likes of California and Illinois have an outsized influence on investors' trigger fingers.
"The next fiscal year begins on July 1 for 46 of the 50 states, and budget negotiations will gather intensity in the coming weeks. Throw in concern over the federal government's debt ceiling, and a few jitters - deserved or not - could easily rattle munis." .......
"But perception is critical in a market where individual investors run the show, holding roughly two-thirds of all munis.
"And some among the crowd that has flocked into the market over the last two years are now running scared. Investors in mutual funds have pulled $20 billion out in the last 10 weeks, more than they poured into the market in 2010." --------
Fact sheet: In the past 10 weeks [January 25, 2011], U.S. investors have withdrawn $20 billion from municipal bond funds, according to Lipper, a Thomson Reuters company that tracks mutual bond fund flows.
About $3 trillion of muni bonds are outstanding, following issuance of $431 billion in 2010 and $407 billion in 2009, according to Thomson Reuters. Insured debt accounted for around half of municipal bond issuance before bond insurers lost their AAA ratings in 2008. In 2010, less than 10 percent of new muni bond deals carried insurance, according to Municipal Market Advisors.
Unlike U.S. companies, state and municipal bond issuers have no obligation to register their securities with U.S. regulators and file financial reports. Instead, underwriters provide investors with some information when marketing bond deals, but disclosure can be minimal, especially for issues that are not rated. Rating firms like Moody's and Standard & Poor's tend to require more information.
Unrated debt accounted for roughly 5 percent, or $20 billion, of total municipal debt sales in 2010, according to data from Thomson Reuters. In 2006, 10 percent of issuance, or $37 billion, was not rated.
Of the 257 municipal bonds currently in default, at least 219 were unrated, according to Municipal Market Advisors. The par amount of muni bonds in default is $8.2 billion.
Municipal bond yields have fallen in 2011 as lower Treasury yields and a falloff in debt issuance have helped the market recover. The average 10-year yield on AAA municipal debt is down 13 percent to 2.7 percent while 30-year yields have dropped 5 percent to 4.45 percent, according to Thomson Reuters Municipal Market Data.
Municipal bond issuance year-to-date has reached only $66.7 billion, down sharply from the $141.9 billion seen during the same period in 2010, according to Thomson Reuters data.
Of the 50 states, 46 start their fiscal year on July 1, according to the National Association of State Budget Officers.
===================== The Huffington Post, May 4, 2011 02:26 PM ET: "As the federal government approaches its legal debt ceiling and scrambles to avoid default, the first losers will be cities and states.
"Starting Friday, the U.S. Treasury will stop issuing special securities that help state and local governments pay for their debt, Treasury Secretary Tim Geithner announced in a letter to Congress this week. This freeze, the first in a series of "extraordinary measures" undertaken by the Treasury to avoid a federal default, could pose difficulties for local governments nationwide, making it more complicated for strapped localities to manage their already weak finances.
"When the "extraordinary measures" begin Friday, the first casualty will be a category of non-marketable bonds known as State and Local Government Series securities, or SLGS (pronounced "slugs"). These securities are tailor-made for state and local governments, designed to help them pay for their debt."
===============
Peter Hayes, Head of the BlackRock Municipal Bonds Group and managing director responsible for a $100 billion of municipal bond investments, is a staunch optimist (May 5, 2011), but fail to comment on the "extraordinary measures" announced previously by Tim Geithner.
"GOP leaders and the White House are discussing a deal that would enact strict deficit targets and some spending cuts to win Republican votes for lifting the ceiling on how much the federal government can borrow. The deal would defer contentious decisions about Medicare, Medicaid and taxes until after the 2012 elections.
"The Treasury estimated this week that if the debt ceiling, now at $14.294 trillion, is not raised, a range of payments would be stopped, limited or delayed on Aug. 2, including Social Security and Medicare checks, tax refunds, interest on the debt and unemployment insurance.
"The Treasury says its borrowing is growing by $125 billion a month. At that rate, it would need a $1.5 trillion debt-ceiling increase to get through one year."
Comment: Given the fact that borrowing is growing on average by $4 billon per day, the decision to procrastinate the crucial problems with "Medicare, Medicaid and taxes until after the 2012 elections" is a clear indication that Plan B is on the table. That makes me shiver, because when the U.S. dollar sneezes, the Euro gets a flu.
Let me try to be utterly optimistic. The Average Billion-Per-Day Increase of Debt (ABPDID) for the period 9/1/2007 - 8/31/2008 (source here) was roughly $1,766,244,000. Suppose this value of ABPDID is 'healthy' for U.S. economy. For the period 9/1/2008 - 8/31/2009 ABPDID jumped to roughly $5,876,900,000, and for the next period 9/1/2009 - 8/31/2010 it decreased with $1,337,900,000, down to $4,539,000,000. Suppose also that every year ABPDID will decrease by the same amount of $1,337,900,000. By 8/31/2011 ABPDID will be $3,201,000,000, and by 8/31/2012 it will reach the 'healthy' $1,863,100,000. If this paraeconomics is correct, in September 2012 there will be light in the tunnel.
Guido Mantega, the Brazilian finance minister who was the first to warn of a “currency war”, said: “Everybody wants the US economy to recover, but it does no good at all to just throw dollars from a helicopter.”
Mr Mantega added: “You have to combine that with fiscal policy. You have to stimulate consumption.” Germany also expressed concern.
An adviser to the Chinese central bank called unbridled printing of dollars the biggest risk to the global economy and said China should use currency policy and capital controls to cushion itself from external shocks.
“As long as the world exercises no restraint in issuing global currencies such as the dollar – and this is not easy – then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament,” Xia Bin wrote in a newspaper under the Chinese central bank.
"Then there's the budget deficit. In terms of gross domestic product (GDP), the deficit is almost double the previous all-time peacetime peak, reached in 1983. What's more, the budget shortfall is being financed largely by the Fed: The so-called "QE2" ("quantitative easing" Round 2) purchases of government bonds account for 70% of the budget deficit between November 2010 and June 2011, and about 25% of total government spending during that same period.
"Yes, the Reichsbank of 1919-23 was worse, financing 50% of Weimar Republic government spending. But that didn't result in inflation - it resulted in "hyperinflation." ......
"In the second scenario, the Fed will end "QE2" as planned in June, concluding its purchase of government bonds. In that case, since July through September are high-deficit months, the net amount of U.S. Treasury bonds hitting the bond markets will rise suddenly - from about $30 billion per month to about $120 billion to $150 billion per month. ......
"With inflation already a worry for bond buyers, that raises the possibility of an almighty bond market crash in the third quarter of 2011."
---------------------- Martin D. Weiss: "There's no one on earth rich enough to bail out America."
But this is trivial. Ben Bernanke certainly knows it.
Question is, does he have Plan B for keeping the picture below ?
The burden of U.S. debt is insurmountable. It can only be resolved by devaluating USD, provided the problems of the current world's reserve currency are absorbed by the whole world with the new word's reserve currency.
He cannot keep the problems of world's reserve currency strictly within the United States. These problems need to be "exported" to the whole world.
The upcoming financial tsunami will be devastating. Do what you have to do.
“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”
William Arthur Ward
================================
Subject: Hope Fades for Much Good to Come From Deficit Fight Date: Tue, 19 Jul 2011 12:05:10 +0300 From: Dimi Chakalov <dchakalov@gmail.com> To: Gerald Seib <jerry.seib@wsj.com> Cc: John B Taylor <johnbtaylor@stanford.edu>, Jeffrey Sparshott <jeffrey.sparshott@dowjones.com>, natasha.brereton@dowjones.com, darren.mcdermott@wsj.com
Dear Mr. Seib,
Regarding "the general selfishness, and we predict self destructiveness, of politicians" (CRT Capital Group), please check out
Your WSJ colleagues act like saying '2+2 = ..... ', and then stutter. I just complete the "calculation" and offer the only possible way out for US dollar.
If you and your colleagues disagree, please do write me back.
Kindest regards,
Dimi Chakalov
..........
What Derailed the Economic Recovery? Three Possible Explanations By David Wessel, WSJ, July 21, 2011
"You could call it the un-recovery."
Many economists have ratcheted down their growth forecasts for the U.S. economy in 2011 from predictions made just a few months ago. Three hypotheses from David Wessel on what derailed the recovery.
#1. This is transitory, the U.S. had a bit of bad luck.
#2. We did it to ourselves.
#3. The hopeful diagnosis of the economy's underlying condition was wrong. This comes in several strains.
The Obama administration's game plan was that domestic consumer and business spending and exports would kick in when the adrenaline of fiscal and monetary stimulus wore off. The stimulus is wearing off, but the private sector isn't kicking in. The administration's prayer was that the housing market would be healing by now; the prayer wasn't granted. .......
A corollary offered by Peter Fisher (...) is that we're in for a unfamiliar stretch of ups and downs in the economy — "increased volatility" in Wall Street jargon.
The reason? Consumers and small businesses can't borrow as readily as they once could. Credit cards and home-equity lines allowed them to keep spending stable when incomes fell, as they were able to do before the recession. When they have more, they spend more; when they have less, they spend less. The first half of this year was a spend-less episode.
As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress. ........
Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend. .........
The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary. .........
To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.
Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse. ..........
The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.
Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.
This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy. ........
A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.
Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.
The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite.
Subject: Re: Economic Armageddon of Biblical Proportions Date: Thu, 16 Jun 2011 21:20:13 +0300 Message-ID: <BANLkTimyWPzQ5S+Yo2CdKU9tfQ-kTshY4Q@mail.gmail.com> From: Dimi Chakalov <dchakalov@gmail.com> To: Martin D Weiss <support@weissinc.com>, Martin D Weiss <issues@moneyandmarkets.com> Cc: Money Morning <customerservice@moneymorning.com>, Shah Gilani <mailbag@moneymappress.com>
Dear Dr. Weiss,
In the latest update of your video, you repeated your claim:
"Right now, for instance, you can buy a bet on further declines in the U.S. financial sector for just $51. And if you time it right, you could walk away with a gain of 364.7%!"
I'm afraid this is impossible, and respectfully disagree, for reasons explained at
Keith Fitz-Gerald, Hidden Inflation: Why Prices Are Rising Faster Than You Think, March 17, 2011:
"The only reason we've been able to stave off complete inflationary disaster so far is that we've exported it to places like China, India and Brazil as part of our monetary policy, in exchange for the cheap goods we've come to depend on. However, that's coming to an end as those economies grow and begin to struggle with inflationary pressures of their own.
"Eventually, inflation will come full circle and when there is no place else for us to export it, there's going to be hell to pay."
--------
Watch Peter Schiff on U.S. national debt, March 4, 2011, 06:41-09:59, and on Japan's need to sell U.S. treasury bonds, March 15, 2011, 07:20-09:57.
-------- Shah Gilani, Insights on Interest Rates: Why Treasury Bonds Are No Longer the Market Bellwether, March 15, 2011:
"But don't be fooled. The only reason things are quiet on the muni-bond front is because there's virtually no supply coming to market.
"Only $29 billion worth of muni-bond offerings were floated in the last two months, compared to $46.5 billion in the first two months of 2010.
"The rest of the year could get ugly." ---
Idem, U.S. Credit Growth: Don't Trust the Headlines, May 6, 2011:
"At a time when folks aren't confident they'll be able to meet their current obligations - let alone financing their own retirements - it's hard to imagine that we'll see robust U.S. credit growth going forward. ....
"Is it any wonder that U.S. GDP decelerated precipitously, falling from a 3.1% rate of growth in the 2010 fourth quarter to 1.8% in the first quarter of the New Year?
"If U.S. credit growth (in the form of loan demand) sputters and stalls altogether, it won't be long before discussion of the U.S. economic recovery is replaced by whispers of a double-dip recession.
Here's the opinion of Lee Adler, a veteran Wall Street analyst (...):
“The evidence shows that banks are again out of the Treasury buying game. It also shows that they lost money in the first quarter, which is insane considering that their cost of funds is zero. It’s an indication of just how dire the circumstances are. Banks continue to accumulate cash at a frantic rate in their accounts at the Fed. The last time reserves rose this fast was in the midst of the crisis in 2008.
“Although the banks did buy some Treasuries in mid March, they have again stopped buying and reduced their holdings, opting to hold cash at the Fed instead. The banks are pulling cash out of the system and depositing it in their reserve accounts even faster than the Fed is printing it, lately 60% faster. We have to wonder what has them so spooked.
“At the same time, FCBs [foreign central banks] purchases of Treasuries are also backsliding, and are well below the threshold where they need to be to keep the markets stable. These elements essentially neutralize the Fed’s pumping. It may not be enough to send the markets lower, and in the absence of new Treasury supply, Fed buying should be enough to keep the field tilted in favor of higher prices. April’s bias should be to the upside, but the background drag will be there.
“Things will get tougher in May when Treasury supply increases, and really tough this summer when the Fed presumably will stop pumping.”
Instead of betting on the Yankees or even Ford Motor Co, unemployed mathematicians took this craft to new and unimaginable levels. They were initially sold as insurance policies. Here's an example: JeffBank has $10 million in the vault.. and of this $10 million, a million of it is yours, and it's in the form of a 5 year Certificate of Deposit (CD), therefore you cannot simply go into JeffBank tomorrow morning and get your money out.. you have to wait the five years. Now lets say you were getting nervous about JeffBank.. and thus your million dollars. Therefore you want some form of insurance on it, and so you then turn to "JaneBank" (which also has $10 million in the vault), who agrees to write you an insurance policy on this million dollars.. so long as you pay JaneBank a monthly premium.
So far, this is legitimate business. But free from regulation, JaneBank then turns to you and says "If you really think JeffBank is going down, we'll write you a $20 million insurance policy, so long as you make the monthly premiums".. even though they only have $10 million in the bank. These are called "naked" Credit Default Swaps.. and are essentially a side bet. Despite not being able to cover their bets, profits at JaneBank are exploding thanks to the monthly premiums they're collecting.. as are CEO bonuses. Today CDS's are written on everything under the sun.. Greek Government Bonds, City of Detroit Bonds, stocks.. everything. The biggest banks in the US.. CitiBank, JP Morgan, Chase, Bank of America.. are so unimaginably head over heels with CDS's it literally blows the limits of imagination. It makes the problems of JaneBank look like kindergarten.
Here's an example of just how bad things are: Bank of America, which has deposits of about $825 billion in deposits, has underwritten CDS's for $48 trillion. Yes Trillion. The entire US economy is only $15 trillion. JP Morgan is the worst.. they guarantee $75 trillion. The entire world economy is $50 trillion.
As a whole, US financial institutions have underwritten about $225 Trillion in CDS, guaranteeing everything under the sun.. including each other. So if one big financial institution goes down, they are likely to take a number of others with them. This is exactly what happened on September 18th 2008, when Lehman Bros was allowed to go under.. and instantly made AIG insolvent. The US Government immediately stepped in to save AIG. The street rumor was that if AIG had gone down, it would've taken down Switzerland's largest bank (UBS) and Germany's largest bank (DeutcheBank). It would've been financial armageddon.
The biggest CDS these days are written on interest rates. If the US Ten Year Bond goes from it's current 3.65% to 7%, the CDS's this will trigger could crash several very large banks.. which would then crash yet more banks.
Bill Gross' Forecast March 3, 2011: "For the moment, we have four months left".
William H. Gross, Two-Bits, Four-Bits, Six-Bits, a Dollar (March 2011): "The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn’t? ......
"Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets. 15% gratuities may lie ahead, but more than likely there is a negative two-bit or even eight-bit tip lying on the investment table. Like I did 45 years ago, PIMCO’s not sticking around to see the waitress’s reaction."
Should you?
This is a tsunami warning. Ignore it at your peril.
D. Chakalov March 11, 2011 Last updated: April 27, 2011, 01:57 GMT
Sometimes predictions turn out to be ludicrous [Ref. 3]. I personally have very little confidence in the mathematical machinery (LPPL) used at the Financial Crisis Observatory (I believe Didier knows my skeptical stance very well).
The crash of USD -- not later than 31 August 2011 -- has been predicted (cusp catastrophe) at
Your professional feedback, as well as the opinion of your colleagues, will be greatly appreciated.
Kindest regards,
Dimi Chakalov
------- [Ref. 1] Bubble Trouble: Can a Law Describe Bubbles and Crashes in Financial Markets? Physics World 24[5], 29-32 (May 2011) http://polymer.bu.edu/hes/articles/ps11.pdf
"Our past work has led to the hypothesis that the LPPL signals can be useful precursors to an ending (change of regime) of the bubble, either in a crash or a less-dramatic leveling off of the growth."
Stephen Gandel: "Verdict: Not a Bubble "The national debt is still a manageable 40% of GDP. Economists warn that growth will slow when it reaches 90% of GDP. The Congressional Budget Office projects it will take nine years (hellooo! - D.C.) to get to that level, and that's if Washington, which is debating the deficit, does nothing. ........ "Gold has already started slipping. It declined 6% in July to a recent $1,160 an ounce. Some economists are warning that continued weakness could lead to deflation. If that happens, expect gold to crater" (to $1,500 an ounce - D.C.).
================================================
Subject: "This is just what we know is coming" Date: Tue, 31 May 2011 11:45:31 +0300 Message-ID: <BANLkTi=a2ASeLAu0M=u9EY4xPcjxC-dR2g@mail.gmail.com> From: Dimi Chakalov <dchakalov@gmail.com> To: Joe Weisenthal <jweisenthal@businessinsider.com> Cc: reich@stanford.edu, glubin@businessinsider.com, LU Sinan and DU Mingyan <master@dagongcredit.com>, Mu Xuequan <xxp69@xinhuanet.com>, Xiaochuan Zhou <webbox@pbc.gov.cn>, Diane Vazza <diane_vazza@standardandpoors.com>, Beth Ann Bovino <bethann_bovino@standardandpoors.com>, Nicholas Kraemer <nick_kraemer@standardandpoors.com>, Evan Gunter <evan_gunter@standardandpoors.com>, David Wyss <david_wyss@standardandpoors.com>
The result of all this should be increased investor confidence in the global recovery, a boost for Asian as well as emerging markets and a more sustained upturn in commodity prices after their recent dip.
For the dollar, though, this could not have come at a worse time.
Not only will the recovery in risk sentiment mean that the currency loses its safe-haven attraction but any support it has found on the basis of yield will suffer.
In recent weeks, U.S. economic data have consistently disappointed dollar bulls.
And the data released this week have already started to do the same. The latest PMI from Chicago proved that activity is faltering and another decline in house prices, for the ninth month in a row, took them to a new post-crisis low.
Economists at ING Financial Markets measured the impact of falling house prices on the U.S. consumer. “This means that in the first quarter of 2011 another $679 billion of home equity evaporated,” they stated.
With that large sum in mind, it isn’t surprising that the outlook for consumer activity remains subdued and that U.S. Treasury yields are sliding once again as expectation of any tightening by the Fed fades fast.
So, in a currency market that is now more likely to be driven by yield rather than risk, the dollar will find that the good news from China only makes its prospects even worse than they were before.
What are they talking about? - A system that came to its knees due to leverage and unregulated markets such as derivatives. Have we done anything to fix the structural issues? Absolutely not - the derivative market remains unregulated and continues to grow. A Fed policy of easy money leads to leverage and speculation, we have bubbles blowing all around us - Commodities, US Treasuries, equities (Clearly visible in tech stocks).
In 2008 we had massive amounts of leverage - How about in 2011? Check, still there.
In 2008 we had unregulated derivatives markets - in 2011? Check, and growing.
Fact of the matter is the last two years were a giant scam brought to you by insane policies and massive piles of debt. Kicking the can and extend and pretend only work until they don’t.
Inflation may become much more acute - reaching the excruciating/ruinous 20% to 50% level - rather than reaching and then holding steady at the uncomfortable-but-bearable 10% level.
The Day the Dollar Died?
If we end up with an inflation rate in excess of 20%, the whole game changes. First and foremost, the U.S. dollar is no longer the dollar; it is a peso. And not just any peso - it is a typical-1980s Latin American peso, a currency that devalues on a regular, near-continual basis, and is forced to drop three zeros every decade or so.
At that point, the world will no longer accept the U.S. dollar as a reliable store of value; trade-settlements and other international payments will be diverted into other currencies and even the doziest central bank will stop buying U.S. Treasuries. The dollar will essentially be dead as a major currency.
If that happens, when we write the epitaph for this country's currency, April 27 will be remembered as the "day the dollar died." That was the day that Bernanke and his fellow Fed policymakers failed to capitalize on their final real chance to stuff the inflationary genie back into the bottle - and set the "pesofication" of the greenback into motion.
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Subject: Re: Your Inflection Point Report Date: Sat, 4 Jun 2011 16:59:06 +0300 Message-ID: <BANLkTimbP7y8EHz-BtnL-nYc-aoR3VORNg@mail.gmail.com> From: Dimi Chakalov <dchakalov@gmail.com> To: Mike Ward <customerservice@moneymorning.com>, mailbag@moneymappress.com
Dear Mr. Ward,
> Congratulations! You'll find a link to your free report below.
Thank you for the link to Jack Barnes' essay "Lambs to the Slaughter", dated June 3, 2011.
I cannot "read the tea leaves" (InflectionPointReport_MMINF0611.pdf, p. 17). Statements like "if the U.S. economy continues to grow" (p. 8) are not supported by the author, and are in sharp contradiction with the viewpoint of Dr. Martin Hutchinson, "The "Pesofication" of the U.S. Dollar",
p. 2: "Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian.” (...) Source: Money Morning staff research" ------
p. 5: "In the case of the U.S. dollar, it was the monetization of our national debt – to fund the deficit spending of the last two administrations – that destroyed the trust in the U.S. dollar. This single action, once boiled down, has carved off the U.S. dollar’s buying power.
"But now – with the dollar at a potential Inflection Point – should the Fed shift away from its currency-debasing policy, this could well prove to be the market bottom. ........
p. 7: "The only way his [Bill Gross] trade will make sense is if the U.S. Federal Reserve makes a surprise quarter-point increase in the benchmark Federal Funds rate – which would set the stage for a long-term series of rate increases in the future. ........
p. 7: "When the central bank decides to change its stance, markets will move. While hawks on the policymaking Federal Open Market Committee (FOMC) have started to sound off about a stronger U.S. dollar, this group lacks the votes, which has kept the market from fearing their comments.
"If and/or when the sentiment within the FOMC changes to favor an increase in rates (or even a “bias” in that direction), then all market biases will change. If you want an example, the best to review is one from 1994 (here Jack Barnes is comparing 1994 apples to 2011 oranges, 'from the beach' - D.C.) when the market endured a steady state of small, incremental increases. Stock prices were challenged, and bond values were hammered. .........
p. 8: "We have seen the Federal Reserve roll out Quantitative Easing 1.0 (the buying of mortgage-backed securities, or MBS), Quantitative Easing “Lite” (the MBS roll-off and replacement with U.S. Treasury bonds), and Quantitative Easing 2.0 (direct “permanent open market operations,” or POMO, to support U.S. Treasury prices as needed anywhere in the curve).
"The result is that the Federal Reserve has generated credits on its own balance sheet which have been used to buy up U.S. assets at no “actual” cost to the central bank. As noted earlier in this report, the Fed’s balance sheet has more than doubled in size during this short time frame, while the central bank has injected liquidity into its member banks.
"As I detailed in the preceding section, the U.S. dollar has experienced significant pain during this process, dropping against other fiat currencies, and against most commodities. Very recently, the market has been expecting some kind of comment on the continuation of Quantitative Easing, which insiders and pundits refer to as Q.E. 3.0 (the mainstream media simply calls it “QE3”).
"U.S. Federal Reserve Chairman Ben S. Bernanke seemed to hint at QE3 during his historic press conference in late April. However, the much-ballyhooed QE3 has not yet been defined and, if the U.S. economy continues to grow (has it started to grow already? - D.C.), may not be needed at all.
"If that’s the case, then it appears the end of this “liquidity cycle” could finally be arriving. .........
p. 9: "The bottom line for us here is that it certainly appears that QE1, QE-lite and QE2 will be drawing to a close by the middle of this summer, if only for a few months, while those in power attempt to see whether the U.S. financial system is capable of standing on its own – without liquidity injections from the Fed. .........
"This leads a market observer to wonder who will be buying U.S. Treasuries when neither the largest international holder, nor the world’s largest mutual fund, is in the market. The answer is that PIMCO’s Gross will, by law, have to start to reverse his position. This makes him a major future buyer of U.S. Treasuries.
"But the obvious question is: Just when?
"The Fed, which has grown its balance sheet to more than $2.6 trillion from less than $900 billion in 2008, has become the largest buyer and holder of U.S. Treasuries.
"The Fed also held about $1.3 trillion in mortgage-backed securities (MBS) purchased during the initial Quantitative Easing foray that the central bank is holding to maturity. These were purchased from large investors, such as the afore-mentioned PIMCO Total Return A Fund (MUTF: PTTAX), which made an obvious bet on the MBS buying before it was announced.
"These MBS contracts, pretty much abandoned by Wall Street traders, were sold to the Fed. This transfer of ownership moved the future losses to the central bank balance sheet.
"This means that as people refinance or sell a home, the odds are that a good chunk of the proceeds are sent to the Federal Reserve as partial payment for the originating MBS holdings.
"This “run off,” as it is called, is pouring billions of dollars per month in fresh capital – in the form of cash – directly onto the Federal Reserve’s balance sheet. The Fed, via its “QE-lite” program, is reinvesting this cash into U.S. Treasuries.
"This program is ongoing and will not be affected by the ending of the QE2 program. So, while the market discusses the end of QE2 and the start of QE3 at some point in the future, QE-lite goes on.
"And that is generating the need for regular purchases of U.S. Treasuries from the open market. ..........
p. 12: "While the Fed has made it clear that it wants to keep rates low for an extended period, it will not be the 800-pound gorilla in the U.S. Treasury bond market it has been during the QE2 period. This means that the long end of the U.S. Treasury market should start to move up in yield. This shift will be driven by a price drop in these very same bonds.
"This is the trade that PIMCO’s Bill Gross is playing. He is supposed to have purchased puts on the U.S. Treasury long end. If so, he is betting on an oversized increase in the long end of the U.S. Treasury yield. This is a very logical outcome to out-of-control spending because of the ever-increasing rollover needs of current debt.
"The move at the long end of the bond market – even if it happens quickly – will be telegraphed by the actions taken at PIMCO. As the world’s largest bond manager, this firm helped set the gold standard for bond exposure. When it starts to unwind its short position, the market will know it and telegraph the event. ..........
"As we’ve noted several times in this report, Bill Gross is one of the largest money managers in the world. He is the portfolio manager of PIMCO Total Return A Fund (MUTF: PTTAX) at Pacific Investment Management Co. LLC. This fund has grown into the largest mutual fund in the world today. It is known as the largest bond fund in the world, but with its size and mandate, it is now the largest mutual fund in any market it enters. ...........
p. 17: "Bill Gross, the acknowledged “Bond King,” has sold all of his U.S. Treasuries, and via the usage of swaps, appears to be net short U.S. Treasuries. (According to a recent Reuters report, the PIMCO Total Return A Fund (MUTF: PTTAX) was 4% short on U.S. Treasuries via swaps in that “world’s largest bond mutual fund.”
"This is significant because his benchmark is 40% long U.S. Treasuries. This has him potentially (is Bill Gross so stupid? - D.C.) up to 50% short his return baseline requirements. He cannot maintain this position for any length of time and stay compliant to his SEC-required mutual fund rules.
"Therefore, it is a significant indication of his expectations of the near-term direction of U.S. Treasury rates.
"The only reason he would position the world’s largest fund in this direction is if he expected an event that would cause U.S. Treasury rates to rise in the near-term. The most obvious way this could happen is if the Federal Reserve announced an early end to QE2, and/or unveiled a surprise increase in the benchmark Fed Funds rate at June’s policymaking FOMC meeting.
"If that happens, Gross will look like a genius again. He’ll generate a great trade as he sold high, and will be ready to reverse his net short position into a panic dumping of U.S. Treasuries as investors adjust to a new Federal Reserve stance.
"As we noted earlier, if the U.S. central bank does change its monetary stance, it would be the first time it did so since the summer of 2007, when the financial crisis started to take shape. At that point the fallout was expected to stay contained within the subprime part of the market.
"The Federal Reserve has to change course at some point, and if you read the tea leaves it looks like it could happen sooner rather than later.
"It appears to me that Bill Gross has already moved in anticipation of this event (only he hasn't yet 'retired to the beach' - D.C.). .........
p. 17: "In the new future, Gross will either be proven right, or be proven wrong.
"However it plays out from a timing standpoint, I doubt anyone is arguing with him about his big-picture view of the U.S. government balance sheet. If Gross is correct, there is a major “event” coming soon to the bond markets.
"When this happens, it will be interesting to see how he deploys his cash. You see, Gross has amassed a horde of cash that is now reported to be worth about $80 billion (you heard me correctly)." --------
Q1: What are those "SEC-required mutual fund rules" (p. 17 above) which will inevitably force Bill Gross to purchase U.S. Treasuries?
Q2: The obvious question: Just when will Bill Gross (and of course China) start purchasing the brand new, high-yield U.S. Treasuries?
Around Christmas, maybe?
See below what Bill Gross himself said about PIMCO's strategy.
"Everything appears well. But bond investors with a survival instinct (being one and the same as our cooking frog) should reflect on that old teeter-totter metaphor and realize that prices near the boiling point automatically imply yields near subzero. Granted, 5-year Treasury rates near 1.70% are not zero and 10s and 30s are even better, but much of the Treasury yield curve now rests in negative territory when compared with expected future inflation, and that should send our bond investor into a hoppin’ funk. Prices are already nearing the boiling point and his coupons are subzero, CPI adjusted. Total return…and our frog…are cooked, or if not they are certainly trapped in a future low return kettle of water. ......
"Carmen Reinhart and coauthors writing for the National Bureau of Economic Research have exposed this dilemma in more sophisticated prose. In her second research paper, entitled “The Return of Financial Repression,” she affirms PIMCO’s thesis of skunking, pocket-picking and frog cooking by describing a century-old policy maneuver used by governments facing a debt crisis. Rather than outright default, many countries attempt rather successfully to keep nominal interest rates lower than would otherwise prevail. Reinhart characterizes this as “financial repression” because over the long term it results in a transfer of wealth from savers to borrowers. Governments, having taken on too much debt, rather stealthily lower interest rates via central-bank-enforced policy rates or maneuvers such as “quantitative easing.” The artificial yields, in effect, act as a tax on savings, undercompensating asset holders and transferring the haircut benefits to the debtor nation. Coincidentally (and certainly serendipitously), corporate and some household balance sheets are re-equitized as the negative or historically low real interest rates allow economic growth, profits and some wage earners to build up a margin of safety for future expansion. .......
"There was this other frog who instead of being tossed into a pot of hot water was left to cool its heels in a pitcher of cold milk. Unable to jump out, he churned and churned those frog legs until eventually the milk turned into butter and the hardened butter allowed him the platform to leap to froggy freedom! Well, let’s get churnin’, fellow frogs. If the U.S. or the U.K. or any other government is going to attempt to boil us alive, let’s make butter!
"Butter in this instance is what PIMCO characterizes as “cheap bonds.” ........
"Journalists, financial advisors, and perhaps even some clients marvel at how PIMCO can be doing so well in 2011 while being underweight the Treasury/durational component of the bond market.
"Folks – we're making butter. If you’re being repressed, our strategy is to churn those legs, get out of the pitcher, and above all stay away from boiling pots of water. ........
"Let me reaffirm what we’ve said for many months now. Because the QEs cover an extraordinary period of monetary policy with a limited time frame, there is not enough data to indicate whether the end of QEII will lead to higher or even lower rates, although higher is our strong preference. “Who will buy them?” remains a critical question to be answered.
"There is, however, overwhelming evidence – now provided by Carmen Reinhart among others – that existing Treasury yields fail to adequately compensate investors for the risk of holding them when measured on an historical basis. .........
"Come on frogs, make butter, not someone else’s dinner."
"Just weeks ago, a group of Journal editors met with one of Europe’s most powerful men. He was asked about a potential downgrade of America’s credit rating, and he delivered his surprising answer. Slowly, he said, the West’s ins
