Mystery Economic Theater 2012

[ewmayer]

[continued]

Originally Posted by chappy

B) Countries whose debt to GDP are 2.4 times the US: Japan. Economic outlook of Japan. continued 2% growth, even following the Tsunami and Nuclear problems.

But, again you (and Prime) have made a claim that you haven't proven, and that I don't agree with. Which is that debt to GDP is the most beneficial (or even a valid) way to talk about whether debt is good.

Just as per capita income is the most valid way to talk about income trends -- duh. Ah, I see you are angling toward "carrying ost of debt" and "return on investment" - OK, that is worth talking about.

When you personally buy a home do you limit your spending by how much you can possibly make in a year? Or do you limit your spending by 1) some multiple of that number so that you can meet all your debt obligations and still have some coins to rub together. 2) assume that there is some value inherent in the debt--the home is worth more than the money spent plus interest. Since a great deal of the debt is money we pay to ourselves and money we have invested in the hope of future earnings I believe we should be talking about 1) what investment in the future the government is making with our debt-money, and 2) if that is worth it, and 3) how can we ensure that when the economy rebounds we begin to work that debt down (instead of cutting revenues by short-sightedly giving tax breaks to the rich).

I agree that debt incurred to finance future growth which exceeds the debt incurred is OK. The problem is, that (multiplier > 1) state has been overwhelmingly absent during the last 3 decades "economic expansion", based on the Fed's own data (specifically the Z1 numbers). Even if you believe in some magic "intangible benefit" to debtorship, using your homeowner analogy, there is carrying cost to consider. The 2 key components of that latter computation are (a) amount borrowed and (b) interest rate. Sure, as long as the central bank manages to keep (b) artificially low, (a) can be large without inflicting severe damage. But you seem to assume that the CB is in full control here, and can keep rates low as it likes, for as long as it likes. And indeed Japan would seem to indicate that this is so. The question is: Is Japan the exception or the rule? Other countries have suffered debt crises long before their debt/GDP reached Japan's level, so I argue that Japan is the exception. Nonetheless it is interesting to examine *why* Japan has managed to reach debt/GDP > 200% without blowing sky-high. A key part of the answer is that they have managed to finance most or all of that debt internally, by converting what was the developed world's highest savings rate into low-yielding government debt. Can that go on forever? Also, how much hidden rot (in the form of bad debt, not yet written off) is there in the Japanese banking system, and can that remain hidden forever? (And are there costs associated with such ongoing capital impairment?)

Another key component of the Japan story is that despite their post-RE-bubble malaise, they still enjoyed the benefit of a strong export economy ... that has been persistently weakening, and now in the wake of Fukushima, with Europe in tatters, and with an escalating trade war with key trading partner China, is absolutely getting destroyed. The problem is, an already -massively-indebted balance sheet severely limits what government can do to try and stimulate exports.

And your spinning of the "ongoing 2% GDP growth" - nice try. That would be considered anemic even if weren't being artificially boosted by government deficit spending. Absent the borrowing, Japan's GDP has been in contraction. As has the U.S.'- just not for as long.

Of course none of that first sentence is even remotely true. I just don't think any of those things have been done in the US. The Fed gave low and zero interest loans of about 16 trillion dollars during the early part of the economic crises. Effectively creating an amount of money equal to the total of the National Debt in 2 years. What happened to your purchasing power in that time? What happened to value of the Dollar in the world market? Nothing. If you want proof that the world trusts the dollar, there it is.

All that proves is that world believes the dollar to be still the best of a bunch of other fiat-money alternatives. "Best of a bunch of bad options" does not equate to "good". And I notice you engage in the same (admittedly clever) sleight of hand Bernanke does: Argue that since the dollar has not lost purchasing power relative to (say) the Euro to "prove" that it is not actively being debased. If you and I jump out of a plane at the same time, and follow similar trajectories, does that mean we are not falling?

Regarding the associated "low inflation" claims: It depends very much on what one is buying. We live in a credit-based economy, so overall monetary inflation inevitably requires credit to be expanding or at least not contracting relative to new money issuance. This is giving Bernanke et al cover for the latter ... for the moment. But one place money printing does cause inflation in a fashion which is hard to mask is in the price of crude goods. Like oil and gasoline, for instance. (Much of whose price feeds into food prices, among other things.) Or did you believe the lie about {alleged] strong demand from the developing world being responsible for ongoing near-record oil and gas prices? That's a nice cover story, but actual global demand numbers don't support it. Another place the money-printing has caused inflation is by way of yet another equity-market valuation bubble. All fine and good, until it inevitably crashes again. These central-bank-fueled bubble-and-bust cycles are deeply damaging to the long-term prospects of the economy, by way of the attendant capital misallocations and false economic signaling they incur. Japan's markets again provide a nice illustrative example. How much sustainable organic private-sector economic growth has that 200%-of-GDP national debt binge bought?

[cheesehead]

Originally Posted by Prime95

Where did I say it ever was???

In post #602, your example -- "A logarithmic chart would make a President/Congress that took the debt from $1 to $100 worse than one that took it from one trillion to two trillion" -- make no sense unless you consider it possible for such a chart to actually show a $1 or $100 debt (so that such a president/Congress would look worse than the $1 trillion/$2 trillion case). Since I was proposing a chart with the real figures, not absurdly small hypothetical ones, plotted against real dates, your objection has no practical purpose except to distract -- a strawman.

A debt of $1 or $100 would never appear on such a realistic-figure chart. If you were to rescale your example to, say, a jump from $10 billion to $1 trillion, then yes, that would make that slope steeper than the $1 trillion-to-$2 trillion jump, but it would appear lower on the chart! So, the steepness would be moderated by ts lower placement -- I don't think most folks would think it looked more disturbing than the $1T-to-$2T.

I merely gave an example showing that a logarithmic chart isn't the best choice.

An example is more convincing, and looks more sincere, if it is at least conceivably possible.

As it is, yours distracted me so much that I forget to say that

I agree that a chart of debt as percentage of GDP would be okay, too, because that would inherently have some of the same scaling effect as a logarithmic chart.

[chalsall]

Originally Posted by cheesehead

As it is, yours distracted me s much that I forget to say that.

Cheesehead... Do you think that faster than light travel is possible without infinite energy?

[ewmayer]

WSJ: Fed Buying 61 Percent of US Debt

The Federal Reserve is propping up the entire U.S. economy by buying 61 percent of the government debt issued by the Treasury Department, a trend that cannot last, Lawrence Goodman, a former Treasury official and current president of the Center for Financial Stability, writes in a Wall Street Journal opinion article published Wednesday.

"Last year the Fed purchased a stunning 61 percent of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis," Goodman writes.

Goodman also warns that U.S. economy and markets are “at risk for a sharp correction” if conditions aren’t “normalized.”

"This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits."

The friend who sent me the above link comments:

The new guideline is that the Fed will not buy more than 70% of any issue. That percentage can change with a simple memo. Two results: the buying at this rate cannot continue. When it stops there will be significant problems.

Which brings me to my quote of the day, from a 2010 appearance by the Chairsatan [ZeroHedge`s favored term] before the House Financial Services Committee, Bernanke delivers blunt warning on U.S. debt:

“We’re not going to monetize the debt” -- Ben Bernanke, 2010:

This is just the latest in a long litany of lies by the counterfeiter-in-chief. Of course he is not alone in this -- they`re doing it in Europe, too.

---------------------------

Related to the subject of fiat currencies and their usage as a vehicle of stealth taxation, the Germans are getting exercised about the gold allegedly owned by their central bank and "held in trust" at the oh-so-trustworthy NY Fed (translation mine):

So much Gold for every German: Germany has the world`s second-largest gold reserves, after the United States; per capita, only the Swiss have more. Economists praise the reserves as a psychological anchor. But how much is really there?

Barbarous relic - that is how revered economist John Maynard Keynes described the gold in the vaults of the central banks back in the early 1920s. Nine decades later, the yellow metal is once again acquiring a significance not held for possible. At least in Germany everything currently seems to be turning on the subject of gold.

Almost overnight the precious metal reserves of the Bundesbank, the second largest in the world, have become a hot political topic: For many years the public hardly paid any thought to it, for years no one was disturbed at the fact that most of the bars (allegedly not cataloged) reside outside of the country.

Call for a return of the gold

A phalanx of politicians, economists and activists is now demanding that the whereabouts of the German Treasury holdings is finally verified. Quite a few even want the gold, held in custody in New York, London and Paris, to be brought home.

Update: In this followup piece in Die Welt, a Bundesbank official states that the bank does in fact possess a detailed gold inventory in the form of an individual-bar list. Now they just need to make sure the Gruber gang truly was caught with all the gold they robbed from the FRBNY back in '95.

[ewmayer]

Friday Kafka Humor: Straight from the self-proclaimed "land of the free":

Top court to hear arguments over government spying: (Reuters) - A debate over how freely the U.S. government can eavesdrop on international communications reaches a climax on Monday in the country's highest court.

The government argues that, because the surveillance is secret, the challengers cannot prove they have been harmed by the law and therefore do not have standing to challenge it.

At least now we know what kinds of things have been keeping the folks at the ironically named Department of Justice too busy to go after the Wall Street fraudsters.

(If any of our U.S. readers is enjoying the new series Elementary as am I - although I expect it to not be renewed past a half-season or so, as is the case for most shows I enjoy - Jonny Lee Miller's character had a delicious Wall-Street-crooks rant on last night's episode.)

[ewmayer]

Obama Defends His Finance Reform Record to Rolling Stone: A Response | Matt Taibbi | Rolling Stone

The sum total of all of this is that Obama didn't really do anything to alleviate the dangers of Too-Big-To-Fail. If anything, we now live in a world that is more concentrated and dangerous than it was before 2008. TBTF companies like Chase and Wells Fargo and Bank of America are even bigger and less-able-to-fail-ier than they were when he took office. This is why Obama's answer to our interview question is so disappointing. If I'm understanding the president correctly, he basically says he doesn't think Glass-Steagall should be re-instated, and beyond that, he just thinks Wall Street needs to self-regulate better.

Retail Sales in Spain Plunge 10.9%, Largest Drop on Record; All Pain, No Gain

Spanish retail sales fell at their fastest pace on record in September as already battered consumer confidence took another hit from a hike in value added tax, driving many shoppers to trade down to cheaper products.

Sales fell 10.9 percent year on year, Monday's National Statistics Institute data showed, reflecting an economy struggling through its second recession in three years and plagued by chronically high unemployment.

The drop was the biggest in calendar-adjusted terms since current records began in January 2004, and marked the 27th monthly decline in a row.

Still at Sea, Storm Drenches East Coast

October 29, 2012 -- Hurricane Sandy churned relentlessly through the Atlantic Ocean on Monday on the way to carving what forecasters agreed would be a devastating path on land that is expected to paralyze life for millions of people in more than a half-dozen states, with extensive evacuations, once-in-a-generation flooding, widespread power failures and mass transit disruptions.

[xilman]

Now the Huffington Post is back up again, sort of, it's possible to read this:

Financial markets around the world aren't reacting much to the disaster in New York on Tuesday morning, either confident that the long-term economic impact will be negligible -- or because of pure shock.

...

European stocks were sharply higher at last check, with the Stoxx 50 index up a full percentage point and the U.K.'s FTSE and Germany's DAX indices each up 0.8 percent. Italy managed to sell bonds Tuesday morning at the lowest interest rates in more than a year. Commodities are trading electronically, with gold up a smidgen to $1713 an ounce
and Nymex crude-oil futures up a bit to about $86 a barrel.

[chalsall]

Originally Posted by xilman

Financial markets around the world aren't reacting much to the disaster in New York on Tuesday morning, either confident that the long-term economic impact will be negligible -- or because of pure shock.

Or, perhaps, because the markets know that in times of disaster there's opportunity for profit?

[ewmayer]

Originally Posted by chalsall

Or, perhaps, because the markets know that in times of disaster there's opportunity for profit?

Or, perhaps, because markets worldwide have become so grossly distorted by central bank machinations, government interventions and the rise of parasitic high-frequency trading that they are nigh-useless as economic signaling mechanisms?

[kladner]

.....the rise of parasitic high-frequency trading.....

Parasitic is the correct adjective. It produces nothing, but it eats the lunches of millions.

[Fusion_power]

Maybe they were just hoping New York would be washed out in the ocean putting an end to some of the parasitism.

DarJones