Time for a New, New Deal?
by Phil - August 15th, 2010 11:15 am
What are people thinking?
It is interesting to see so many of the same people calling for a "double dip" recession while at the same time railing against government spending. The US Government is spending $3.5Tn this year. Admittedly that’s $1.5Tn more than they have, but it’s quite a lot of money no matter how you look at it. Conservative, born-again deficit hawks (they were born-again the day Obama was elected) will tell you the solution is to cut taxes and let corporations trickle their wealth down on the bottom 99%, well over 20% of whom are unemployed or under-employed.
The Big Lie being told by the right is that we can solve our problems by cutting spending and (ROFL) lowering taxes. Let’s put lowering taxes over to the side and look at cutting spending. By far, our single biggest discretionary line item is Defense, at $782Bn a year. The sum total of all other discretionary spending is only $437Bn so cutting 100% of non-defense discretionary government spending would knock not even 1/3 off our $1.5Tn debt.
What exactly would be included if we make all or part of those $437Bn in cutbacks? Here’s a great chart from Wallstats on Death and Taxes, which I think every deficit hawk should buy the poster of (6 square feet) and put in their office with red lines through all the programs they can do without. Try it, it’s fun – see how much money you can save!
Of course, let’s keep in mind that the $1.5Tn the government spends directly employs 2.7M people and millions more indirectly so, for every person you cut, make sure you add back $20,000 a year for unemployment benefits and administration (or are we going to throw them all on the street?). So that’s, unfortunately, $20Bn spent for every million jobs you destroy. Gosh, this game gets complicated, doesn’t it? Here’s a nice chart you can throw darts at and see how many of these guys you can kick to the curb by Christmas because that’ll fix the economy, won’t it? Don’t worry, I’m sure none of them are your customers because surely you don’t deal with THOSE kind of people:
So we cut, for argument’s sake, 50% of our $437Bn discretionary budget and that leaves $1.1Tn to cut out of our $782Bn defense budget. Hmmm, tricky… I suppose we’re done with TARP in 2010 so there’s $150Bn gone but maybe…
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DiggLabor Fights Back
by ilene - July 20th, 2010 7:40 pm
Labor Fights Back
Courtesy of SHAMUS COOKE writing at CounterPunch
If the U.S. economy eventually recovers and current trends continue, U.S. workers won’t be celebrating in the streets. The corporate establishment has made it clear that a “strong recovery” depends on U.S. workers making “great sacrifices” in the areas of wages, health care, pensions, and more ominously, reductions in so-called “entitlement programs” — Social Security, Medicare, and other social services.
These plans have been discussed at length in corporate think tanks for years, and only recently has the mainstream media begun a coordinated attack to convince American workers of the “necessity” of adopting these policies. The New York Times speaks for the corporate establishment as a whole when it writes:
“American workers are overpaid, relative to equally productive employees elsewhere doing the same work [China for example]. If the global economy is to get into balance, that gap must close.”
and:
“The recession shows that many workers are paid more than they’re worth…The global wage gap has been narrowing [because U.S. workers’ wages are shrinking], but recent labor market statistics in the United States suggest the adjustment has not gone far enough.”
The New York Times solution? “Both moderate inflation to cut real wages [!] and a further drop in the dollar’s real trade-weighted value [monetary inflation to shrink wages] might be acceptable.” (November 11, 2009).
The Atlantic magazine, agrees:
“So how do we keep wages high in the U.S.? We don’t…U.S. workers cannot ultimately continue to have higher wages relative to those in other nations [China, India, etc.] who compete in the same industries.”
President Obama speaks less bluntly about the wage subject for political purposes, but he wholeheartedly agrees with the above opinions, especially when he repeatedly said:
“We must lay a new foundation for growth and prosperity, where we consume less [as a result of lower wages] at home and send more exports abroad.”
So how will Obama implement his economic vision that inspired Wall Street to give him millions during his Presidential campaign? Much of the work is happening automatically, due to the Great Recession. Bloomberg news reports:
“More than half of U.S. workers were either unemployed or experienced reductions in hours or wages since the recession began in December 2007… The worst economic slump since the 1930s has affected 55 percent of
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ALAN GREENSPAN SOUNDS THE BOND VIGILANTE SIREN CALL
by ilene - June 18th, 2010 5:43 pm
ALAN GREENSPAN SOUNDS THE BOND VIGILANTE SIREN CALL
Courtesy of The Pragmatic Capitalist
The lead story at the Wall Street Journal is an absurd diatbribe from none other than the U.S. central banker who has been wrong about just about everything over the last 25 years. Alan Greenspan has officially joined the legion of deficit terrorists and flat earth economists who believe the U.S. is on the verge of imminent collapse at the hands of the bond vigilantes.
Alan Greenspan has been more than discredited over the course of the last 10 years. This is a man who helped deregulate the financial sector while also believing that he controls every twist and turn in the U.S. economy via his interest rate press releases. Of course, the last 18 months have proven the monetarists terribly wrong. The Enron banking system has also proven that deregulation substantially contributed to our current predicament. But don’t take it from me. The man himself admitted in 2008 that his models were “flawed”:
“I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works. I had been going for 40 years with considerable evidence that it was working exceptionally well.”
Nonetheless, he remains a reliable and important adviser on monetary and fiscal policy in the United States. Now he is helping rally the troops in an attempt to implement 1930’s style austerity.
Don’t be fooled by today’s low interest rates. The government could very quickly discover the limits of its borrowing capacity.
An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large U.S. borrowing capacity are misleading.
Borrowing? What borrowing? The United States budget deficit is not “borrowed money”. We fund our own spending internally. We do not borrow one penny from abroad. China is not our banker. Japan is not our banker.
Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.
Inflation has remained remarkably subdued? Yes, this has surprised only those who fail to understand how the monetary system works. …
DALIO: RECESSION ON THE HORIZON, NO INFLATION
by ilene - May 29th, 2010 7:20 pm
Ray Dalio was interviewed in this week’s Barrons. In case you missed my previous post about Ray Dalio’s life philosophy, Mark Ames wrote a scathing article "TOP BILLIONAIRE HEDGE FUNDER SEES HIMSELF AS A HYENA DEVOURING WILDEBEESTS" comparing Ray to a hyena. Ray fan, or not, Pragcap recommends reading the full interview (subscription required). Here are some important points, courtesy of The Pragmatic Capitalist. - Ilene
DALIO: RECESSION ON THE HORIZON, NO INFLATION
Great interview in this week’s Barrons with Ray Dalio of Bridgewater. For those who aren’t familiar with Dalio he is the founder of the largest hedge fund in the world with $75B in assets under management. I highly recommend reading the interview in its entirety, but for those just looking for some highlights I’ve done the legwork for you:
On the stock market rally:
“It caused the stock market to retrace about 60% of its decline, and it caused the U.S. economy to retrace 40% of its decline. But it did not produce new financial assets. There has been very little new lending. The stimulus produced very little in the way of economic activity.”
On the bailouts and potential for recession:
“There is a lot of criticism about saving financial institutions and running a big budget deficit, but if the government didn’t do those things we would be in a terrible situation. It will be impossible to stimulate that way in the future because politically it is untenable. That’s a risk because, between now and 2012, the economy will probably go down again, and it will be important for monetary policy and fiscal policy to be able to be stimulative, and for the Federal Reserve to be able to purchase assets again.”
How soon will the recession occur?
“It will probably come sooner than most recessions do. Usually, there is about five years between recessions, but for various reasons related to the size of the debt, the next recession is going to come sooner.”
On the recovery:
“But it is a fragile recovery, and credit growth is not picking up very much, and it goes back to the fact we still have too much debt. We have not reduced our debt burdens in any way significantly. What we’ve done is to largely roll them to the vicinity of 2012 to 2014. Corporate balance sheets are much, much better because
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Geithner on “Sustaining the Unsustainable”; Bill Gross, Robert Mundell say Sovereign Default Likely Inevitable
by ilene - May 26th, 2010 3:46 pm
Geithner on "Sustaining the Unsustainable"; Bill Gross, Robert Mundell say Sovereign Default Likely Inevitable
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Courtesy of Mish
Sustaining the Unsustainable
Treasury Secretary Tim Geithner had me laughing out loud over his statement yesterday in Beijing where he took part in the two-day U.S.-China Strategic and Economic Dialogue.
"European leaders face the difficult challenge of trying to restore sustainability to an unsustainable system."
Yes Tim, that challenge would indeed be "difficult", in fact, impossible by definition.
It is a contradiction in terms and thus logically impossible to suggest it is possible to "sustain the unsustainable". Geithner needs math lessons or logic lessons, most likely both.
Sovereign Default Inevitable
With Geithner focused on the impossible, others have a more practical outlook. For example, Bill Gross and Noble Prize winning economist Robert Mundell say Sovereign Default May Prove Inevitable for Nations.
Pacific Investment Management Co.’s Bill Gross said restrictive lending rates and austerity measures that slow growth may leave default as the “only way out” for some sovereign borrowers dealing with mounting debt and deficits.
“Credit and equity market vigilantes are wondering if in many cases sovereigns haven’t already gone too far and that the only way out might be via default or the more politely used phrase of ‘restructuring,’” Gross wrote in his June investment outlook today on the Newport Beach, California-based company’s website. “It may not be possible for a country to escape a debt crisis by reducing deficits.”
“At the now-restrictive yields of Libor plus 300-350 basis points being imposed by the EU and the IMF alike, there is no reasonable scenario which would allow Greece to ‘grow’ its way out,” said Gross, co-chief investment officer of Pimco and manager of the world’s biggest mutual fund.
Nobel Prize-winning economist Robert Mundell said reworking debt may be “inevitable” for one or two countries that share Europe’s common currency in the next five years.
“Debt restructuring may be needed for one or two fiscally weak euro members,” he said today at a conference in Warsaw. “In five years it may be inevitable, but it doesn’t mean euro deconstruction, it just means debt restructuring.”
Geithner Pleads Bazooka Be Fired
As noted above, it is not only “difficult” it is impossible by definition to achieve the unachievable, thus extremely foolish to even attempt such a maneuver.
However, logical impossibilities did not stop Geithner’s plea to fire the $1 trillion
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Greek Riots Escalate, Branch Of Finance Ministry Set On Fire
by ilene - May 5th, 2010 6:58 pm
Greek Riots Escalate, Branch Of Finance Ministry Set On Fire
Courtesy of Tyler Durden, Zero Hedge
Things are heating up again in Greece. Literally. After a firebomb at a Marfin branch earlier today was the cause of three tragic deaths, the latest building to succumb to rioting pyrotechnics is a branch of the Greek ministry of finance, reports Market News. We eagerly await for the Greek FinMin to announce that the docs burned down were the only copies of all sovereign lending agreements with foreign entities… all $300 billion of them. Perhaps now that Greece has lost all control is why the Greek president Karolos Papoulias just said that "The country is at the edge of the abyss." Luckily for the country, its riot police is not striking just yet. Which is more than one can say about Greek journalists: "Even Greek journalists were on strike, but they later went back to work in order to cover the riots." And that about explains all you need to know about Greece.
From Market News:
ATHENS (MNI) – A building belonging to Greece’s Finance Ministry was set afire Wednesday by rioters protesting the stringent four-year austerity plan the Greek government has agreed to accept in exchange for up to E110 billion in aid from fellow Eurozone countries and theInternational Monetary Fund.
The Finance Ministry issued a statement Wednesday night saying that no crucial documents had been lost, though the damage to the building was extensive.
The fire came on a day when a general strike against the government’s new fiscal plan erupted into violence, leaving three dead and tens of others wounded. In Athens, protesters gathered around the Parliament while some groups threw fire bombs at buildings, cars and banks. The police answered with tear gas and arrests.
The package of spending cuts and tax hikes is intended to reduce the public budget deficit by 5.5 percentage points of GDP this year alone, from 13.6% to 8.1%. It is envisioned that by 2014, the deficit will be brought under the EU’s limit of 3%. But in that same year, outstanding public debt is projected to be an astronomical 144% of GDP, up from 113% in 2009 — leading many to predict that a Greek bond default is inevitable.
All we know is that Lazard, which no way, no how is advising on…
Trichet, a Monetarist Pussycat at Heart, Throws ECB Rulebook Out the Window
by ilene - May 4th, 2010 3:50 pm
Trichet, a Monetarist Pussycat at Heart, Throws ECB Rulebook Out the Window
Courtesy of Mish
After all his tough bulldog talk over the years, the world can now see Trichet is in reality nothing more than a monetarist pussycat when the chips are on the line.
Let’s recap.
Trichet Floods Banking System With Cash
October 08, 2008: Trichet Offers Unlimited Cash
European Central Bank President Jean-Claude Trichet said he can’t rule out further interest-rate cuts after joining a round of global reductions today and offering to flood the banking system with as much cash as it needs.
So Much For Price Stability Mandates
What was it someone was telling me just two weeks ago? Oh, here it is: "Trichet will NEVER cut. The ECB has price stability mandates."
The person went out of his way to put "NEVER" in caps.
That’s rather touching given that today the ECB made a 50 basis point in conjunction with global coordinated panic (see Global Coordinated Rate Cuts Won’t Solve Economic Crisis).
ECB Waives Collateral Rules
May 03, 2010: ECB Comes to Greece’s Aid by Waiving Collateral Rules; ECB Plays With Fire; Europe’s Web of Debt
In a move that is supposed to stop contagion and inspire confidence, the ECB Comes to Greece’s Aid by Waiving Collateral Rules
The European Central Bank joined the international rescue of Greece, saying it would indefinitely accept the country’s debt as collateral regardless of its country’s credit rating, underpinning gains in the bond market.
Today’s decision was a reversal for ECB President Jean-Claude Trichet, who began the year saying the ECB would not change its “collateral policy for the sake of any particular country.”
ECB Plays With Fire
This is a dangerous precedent that challenges the credibility of both the ECB and Jean-Claude Trichet.
Intermediate-term, the ECB’s actions add more tinder to the woodpile. Spain and Portugal are the matches.
Rulebook Heads for the Window
May 03, 2010: Trichet May Rewrite ECB Rule Book to Tame Greek Risk
European Central Bank President Jean- Claude Trichet, who capitulated on a January pledge not to relax lending rules for the sake of one country, may have to sacrifice more principles to prevent Greece from bringing down the euro.
Trichet yesterday diluted rules for the second time in a month to guarantee the ECB will keep taking Greek government bonds as collateral for
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Actually, The US Is Massively Bailing Out California, And You Should Be Relieved About That
by ilene - March 1st, 2010 12:14 am
Actually, The US Is Massively Bailing Out California, And You Should Be Relieved About That
Courtesy of Joe Weisenthal at Clusterstock
Image: http://en.wikipedia.org/wiki/California
Last week we compared our situation in regards to states like California’s to the EU’s Greek situation, and grimly noted that the main difference seemed to be size: California is a much bigger deal to the US than Greece is to the EU.
Other than that, there didn’t seem to be much of a difference: Both systems have a common currency, while states are forced to manage their own budgets.
However, this was not exactlycorrect, and it’s worth clarifying.
We do actually have a automatic mechanisms for bailing out the states. As George Soros noted today in a CNN interview, we do have various transfer/welfare mechanisms that are funded in part by the federal government. Unemployment benefits, for example, are coordinated at the state level, though the Federal Government replenishes these funds with loans. Federal health programs serve a similar effect. These aren’t considered "bailouts" per se, but that’s exactly what they are.
Granted, California is nowhere near "bailed out," but without these various mechanisms, the situation wou ild obviously be much worse, and a Greek-style crisis here would be much more acute. (It could happen anyway here, we don’t know, but the point is for now we do have some curbs and limits that take some of the edge off).
Now of course, some will react that we should "let ‘em fail," which is fine so far as it goes, though holders of that view should be aware that big, liberal states like California and New York have long been net payers to the Federal Government, while more conservative "red states" have been net recipients in the tax system. This is not good or bad, it’s just what it is, and it out to be considered.
Don’t Worry: Prosperity Is Just Around The Corner
by ilene - February 1st, 2010 1:55 pm
Don’t Worry: Prosperity Is Just Around The Corner
Courtesy of Henry Blodget at Clusterstock/Business Insider
Anyone who has followed perpetually troubled companies has no doubt experienced one of their favorite (and surprisingly effective) tricks:
Continually publish rosy forecasts of future recovery that sound great at the time but never actually materialize. As the happy forecasts fail to materialize, revise them, pushing the recovery to the next year. And so on.
This trick, of course, is not only a favorite of companies. Wall Street analysts and governments love it, too.
In the early years of the Great Depression, for example, Herbert Hoover was fond of saying that prosperity was just around the corner.
And it was. As long as you measured in decades.
Today, President Obama is selling his new budget. It includes a horrifying deficit for this year, but then a smaller deficit in all the following years. Prosperity, in other words, is just around the corner.
But it was just around the corner last year, too. Check out this chart from the WSJ that shows what President Obama’s soothsayers foresaw for future deficits at this time last year:
Last year at this time, 2009 was going to be the worst year, followed by a happy reduction in the deficit in 2010 and 2011 and so on.
This year, 2010 is going to be the worst year, followed by a happy reduction in the deficit in 2011 and 2012. And so on.
And next year?
Never mind. Just rest assured: Prosperity is just around the corner.
See Also:
So, How Do You Think This Movie Will End?
Goldman: After Six Months, We Can Safely Say This Is No V-Shaped Recovery
Thrilling Thursday – Obama plus Jobs (Steve, not employment) Boost the Market
by Phil - January 28th, 2010 6:15 am
You would think I would have a lot to say about the IPAD but I don’t.
After all, I named the IPad back in December 2008 when I told Members: "AAPL just announced a deal to do Ebooks on IPhones and ITouch and that is the intermediate step towards the IPad, which should be a 2-3x size version of the IPhone that takes the place of a Kindle or a laptop or a notepad or…" I also ran a very close to accurate picture of the IPad back on Sept 11th (and the live images are here), which documents our bullish take on AAPL all the way from $85 and reiterated in Sept at $170 (but we were out at $213 Tuesday, back in at $202 yesterday for the ride back up as we got our expected sell-off during the Apple event) – so this is all old news for us at PSW.
Back in September I said: "So we are happy, happy AAPL owners and Piper Jaffray’s Gene Munster thinks AAPL can sell 2M units of the IPad at $600 each to generate an additional $1.2Bn in revenues in 2010 and I think he’s low. Also, it should be noted that we went with GLW back in December on the premise that millions of touch-screen IPads would use a lot of high-end glass." I am very pleased that the basic model came in $100 lower than my target but, as with IPods – who buys the basic model? Delivery in 60 days means I should hit my sales targets no problem and I it doesn’t look like GLW will be the supplier of IPad glass (LPL seems more likely) but the demand for glass will still be stunning and GLW is up 26% since September so we’re not going to whine about it (I still like them).
OK, enough about toys, on to the President, who gave his State of the Union Address last night, making the following notable points (my notes in brackets):
I’m proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat. I’m also proposing a new small-business tax credit, one that will go to over 1 million small businesses who hire new workers or raise wages. While we’re at it, let’s also
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(