View Full Version : An economic sea change - starting today
We have entered into a new and unexplored territory under the leadership of the Fed, the Treasury, and Chairman Bernanke. In its efforts to fight inflation, the Fed has pulled out all the stops. In my opinion, the U.S. has entered a period that may prove as challenging as any in our history - one which none of us will be immune to.
Here's why:
First, the Fed has started creating large sums of money out of nothing. The fancy term is quantitative easing; in essence, the printing presses are now churning out currency.
WASHINGTON — The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.
Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like buying securities as a way of getting more dollars into the economy, a tactic that amounts to creating vast new sums of money out of thin air. But the moves on Wednesday were its biggest yet, almost doubling all of the Fed’s measures in the last year.
(Excerpted)
LINK (http://www.nytimes.com/2009/03/19/business/economy/19fed.html)
Now, let us look at the well-nigh immediate consequences:
MOSCOW, March 19 (Reuters) - China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.
Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.
LINK (http://www.reuters.com/article/usDollarRpt/idUSLJ93633020090319)
If the dollar loses its reserve status, then the U.S. is faced with the problem of living within its means - moreover, we must do so as tax revenues decline due to the current recession.
Let us consider the budget:
We'll spend about $3 trillion dollars this year. You can see the breakdown HERE (http://govbudget.com/front/?p=spending)
Now notice that the deficit, as announced today, will increase to $1.75 Trillion dollars for the year.
President Obama is expected to receive bad news on the budget front on Friday as the nonpartisan Congressional Budget Office releases what sources say will be a grim assessment of his $3.6 trillion budget's affect on the nation's deficit, a $1 trillion increase above previous projections.
The staggering figures will include the recently-passed $787 billion stimulus bill and the $410 billion omnibus spending package, both adding directly to the deficit, and to members' concerns that Obama is trying to do too much, too fast.
Obama has projected an historically-high federal deficit of $1.75 trillion this year, but he expects to cut that down to $533 billion by 2013.
LINK (http://www.foxnews.com/politics/first100days/2009/03/19/lawmakers-debate-impact-deficit-projections-obamas-budget-plan/)
So if the U.S. were to lose the ability to borrow more money, every program - including Social Security, Medicare, Medicaid, and Defense - would face an immediate loss of 50% of its budget.
Will that happen? I certainly hope not. And matters often muddle through in something better than a worst case scenario. I expect economic challenges to continue, and perhaps to worsen. On the good side, even though we as a nation have some financial problems, most other nations are in worse shape. This may make our debt a safe-haven, at least for a time.
nmap,
Sir, I learn plenty after reading your posts, I think I may just start selling pencils and paper on the corner sooner then later.
2charlie
03-20-2009, 13:20
Sadly, the Fed was given this ability when our currency was taken off the gold standard. Our currency is backed by nothing, so it means nothing to print more. Except massive inflation and the host of other possible issues listed by nmap. Maybe we can just print so much cash that the piddly little deficit won't look so bad.
-2charlie
Dozer523
03-20-2009, 15:35
Those cookies are going to taste REALLY bad!:mad:
Red Flag 1
03-20-2009, 15:42
nmap,
Sir, I learn plenty after reading your posts, I think I may just start selling pencils and paper on the corner sooner then later.
Think I'll open a tavern!
I know I will need one....cheaper than a trip to the movies, and we'll all feel better in the end!
Is there any good news today????
:munchin
RF 1
Those cookies are going to taste REALLY bad!:mad:
Dozer--
Your cookie metaphor is as funny as it is painfully instructive.
On the one hand, I, too, think the cookies are going to be pretty awful. I've attached a copy of Russell's newsletter, and he seems to have a similar view.
But on the other hand, I contend that a combination of information and some appropriate mental abilities will protect us from the fate of selling pencils on the corner. Now it may be that our houses will be a little smaller, and the mass of people may not have big-screen flat panel televisions. Perhaps we will have to make do with hamburger instead of fillet mignon. But there are other pleasures to be had.
If the Fed's policies lead to high interest rates, many will be hurt. On the other hand, those with money to put in the bank may start getting a decent yield. If prices crash, then those who have kept cash reserves have a once-in-a-lifetime opportunity coming up.
Example - prior to my birth, my parents lived in a modest little house in Wichita Falls, Texas. It was worth all of $600 - this was circa 1947, if I remember the story. A few years later, lots in small towns in Arkansas - towns like Bull Shoals - were available for $20. Had they had the foresight to purchase such things, I would now be disgustingly wealthy. If only. :boohoo
The point is, current developments may make similar opportunities available to us. So the point of the post is not to cause despair; no, present developments are just the prelude to opportunity. It may be a while - years, perhaps - but patience can deliver rewards, IMO.
Surf n Turf
03-20-2009, 20:34
(Excerpted)
the U.S. has entered a period that may prove as challenging as any in our history - one which none of us will be immune to.
“the Fed has started creating large sums of money out of nothing. Reduced the key interest rate it controls nearly to zero.
Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions –
Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy.
Nmap,
It appears that the FED has about fired most of it’s ammo, But Ben Shalom Bernanke has to fight the current “deflation” by injecting some “inflation” into the economy.( I would suggest that a trillion is a tad much). It appears he is more concerned with balancing the cycles than restoring confidence in the monetary system.
Russia, China, and India can call for a “world currency” all they want, but what would it be based on – and unless it was backed by Gold, would anyone, anywhere trust it for commerce. The idea of a Central Bank was to keep politics out of the monetary system :rolleyes:, and we see how well that has worked in America. Imagine what it would look like if current Global politics set the monetary rules. (Maybe BASEL I & II never happened, and there’s no Bank for International Settlements (BIS)).:D
If the dollar loses its reserve status, then the U.S. is faced with the problem of living within its means - moreover, we must do so as tax revenues decline due to the current recession.
Don’t think this could / would happen, but sounds like a wonderful idea to me, where do I sign up. Of course, I would have to pay my own way, and we as a country would have to cut spending, and do some things to actually increase revenue to the Federal Treasury. Like eliminating Mark to Market, Sarbanes-Oxley, decreasing / eliminating Capital Gains Tax, increasing investment tax credits, Increasing R&D Credits, eliminating taxes on savings and canceling the $787 billion stimulus bill and the $410 billion omnibus spending package, Re-clawing back TARP funds, and freezing federal spending at current levels.
Sounds like a plan
So if the U.S. were to lose the ability to borrow more money, every program - including Social Security, Medicare, Medicaid, and Defense - would face an immediate loss of 50% of its budget.
Sounds scary, but the alternative of living in a Socialist Totalitarianism state is probably much worse. “A government big enough to give you everything you want, is big enough to take away everything you have” -- Thomas Jefferson
On the good side, even though we as a nation have some financial problems, most other nations are in worse shape. This may make our debt a safe-haven, at least for a time.
Isn’t that a bit like saying – My date is a two bagger, but yours is coyote ugly. :confused: :D
Enjoy you posts immensely,
SnT
Surf n Turf
03-20-2009, 20:39
nmap
On the one hand, I, too, think the cookies are going to be pretty awful. I've attached a copy of Russell's newsletter, and he seems to have a similar view.
As I was reading your post, I was just unpacking two boxes from Hannes Tulving. I believe Russell and I are on exactly the same page, and have been for years. A Genius is someone who agrees with you.:D
If the Fed's policies lead to high interest rates, many will be hurt. On the other hand, those with money to put in the bank may start getting a decent yield. If prices crash, then those who have kept cash reserves have a once-in-a-lifetime opportunity coming up.
You are correct, Sir. I just wish I had better insight as to how high interest rates will go, and how much inflation will accompany the higher rates.
The point is, current developments may make similar opportunities available to us. So the point of the post is not to cause despair; no, present developments are just the prelude to opportunity. It may be a while - years, perhaps - but patience can deliver rewards, IMO.
Namp,
I really enjoy your insight into the financial markets. I know you are spot-on with your analysis that the coming times offer opportunities, just as were available in the early 80’s (after Carter). My big concern is that Øbama is an ideologue that doesn’t care if he crashes the economy. :eek:
SnT
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered." Thomas Jefferson 1802:
My big concern is that Øbama is an ideologue that doesn’t care if he crashes the economy. :eek:
Thank you for the kind words.
As the dreadful economic news piles up, President Barack Obama challenged the nation Saturday to not just hang in there but rather to see the hard times as a chance to "discover great opportunity in the midst of great crisis."
LINK (http://www.msnbc.msn.com/id/29567427/)
Doesn't care? Or does care, and desires the opportunity for instituting profound change?
An affluent people with savings and secure jobs will avoid socialism. But what of a suddenly poor people, one which is afraid? Will they embrace socialism? I wonder.
ZonieDiver
03-21-2009, 11:26
Thank you for the kind words.
As the dreadful economic news piles up, President Barack Obama challenged the nation Saturday to not just hang in there but rather to see the hard times as a chance to "discover great opportunity in the midst of great crisis."
LINK (http://www.msnbc.msn.com/id/29567427/)
Doesn't care? Or does care, and desires the opportunity for instituting profound change?
An affluent people with savings and secure jobs will avoid socialism. But what of a suddenly poor people, one which is afraid? Will they embrace socialism? I wonder.
I think you are spot on here, nmap (as usual)! He wants to be a latter-day FDR and sees this as his opportunity. IF the economy recovers quickly, that won't be possible. We will have to plunge into the depths to allow what he really wants to do to take place.
I pray I am wrong, but fear I am not.
I came across an interesting bit of rumor today. It is pure speculation, not verified, and perhaps not verifiable. However, it appears to make sense. I'll summarize, then provide a link.
GM has lots of debt, including bonds.
It is possible to buy insurance against default on such bonds, using Credit Default Swaps (CDS).
AIG has offered lots of CDS.
The U.S. government continues to support AIG, including the payoffs of CDS.
So...let's suppose someone has some GM bonds. GM seeks to negotiate away part of the debt. If a holder of the bonds is insured against default, he has no reason to accept. He can simply refuse, force the company into bankruptcy, then collect full value for the bonds. He can then sell the bonds for some small amount and get even more money. Bottom line - for the big bond holders, this is a can't lose deal. Notice that a GM bankruptcy is more profitable than if GM continues as a going concern. One way, the bond holder gets the entire amount of principle, plus the residual value of the bonds. The other way, the holder must wait until the bonds mature. Therefore, a GM bankruptcy is the best outcome from the bondholders' perspective.
Thus, the large bond holders have every reason to force a GM bankruptcy, and none to prevent it.
Does this help the large investment houses, while sticking the taxpayers with yet another large bill?
Rhetorical question: Why? Why would the federal government follow such a path?
Anyway, see what you think. Apply suitable amounts of salt.
LINK (http://market-ticker.org/archives/921-GM-Bankrupt,-UNLESS.....html)
2charlie
04-02-2009, 09:50
It would be interesting to know who the major CDS holders are, maybe even how many lobbyist they have working DC. My favorite quote from that article:
"Get ready America - you're about to get it in BOTH holes this time."
These are the types of plots you see in James Bond movies, like when the guy bought put contracts and tried to blow up the airplane..... Only it's not the put writer thats getting screwed.
I came across a series of charts, published on a blog with a fairly good reputation. The charts originate with the St. Louis branch of the Federal Reserve.
Here's what's interesting - in more than 20 different areas, the official numbers show substantial deterioration in the underlying numbers for our economy. That isn't good, although an argument can be made that they represent past numbers and hence perhaps matters will improve. However, there is also the issue of volatility - it's hard to do any sort of business when tomorrow is filled with uncertainty. For example, why hire an employee if the fundamentals of the business environment could change radically. Notice how these charts incorporate radical change in a short period of time.
LINK (http://economicedge.blogspot.com/2009/04/economic-cliff-diving-by-charts.html)
But on the other hand, I contend that a combination of information and some appropriate mental abilities will protect us from the fate of selling pencils on the corner. Now it may be that our houses will be a little smaller, and the mass of people may not have big-screen flat panel televisions. Perhaps we will have to make do with hamburger instead of fillet mignon. But there are other pleasures to be had.
Wonderful point of view nmap. My Aunt raised 12 kids in Southern, MO. with 3 bedrooms, 1 bath, a fire place, a kitchen and a big table. Christmas wasn't toys, it clothes and essentials........regardless they all smiled ear to ear.
A lot of love, making the most of what you have and some hard work will get you through anything and will buy you more than money ever can.
It appears that I have been too much of an optimist. My sunny disposition seems inadequate for current conditions. ;)
Seriously, the following article from CFO magazine suggests that the CPAs who audit public companies believe that nearly 25% of them may not survive the year. In my opinion, and if their views prove correct, the consequences could ripple throughout the global economy. The political implications are likely to qualify as interesting.
There is a possibility that the audit firms are protecting themselves; let us hope that is the case.
For your reading consideration...
Auditors: Nearly 25% of Companies May Not Be Going Concerns
A research firm predicts 3,589 public companies will report that their auditors doubt they will continue as going concerns.
Sarah Johnson, CFO.com | US
April 22, 2009
The auditors of nearly one-quarter of publicly traded companies feel that the companies may not live out the year.
Auditors have become increasingly doubtful about their clients' ability to continue as going concerns, according to the most recent report on the subject by Audit Analytics, which has tracked the number of such going-concern opinions this decade in a recently released report. With calendar year-end 2008 filings still coming in to the Securities and Exchange Commission, the research firm estimates there will be 3,589 going-concern opinions eventually filed for 2008 annual reports, an increase of 9% compared to last year's total of 3,293 going-concern opinions.
Audit Analytics made this prediction based on a compilation of regulatory filings made as of late March for 2008 10-Ks. Its data suggests auditors' going-concern doubts were more commonplace compared to the previous year. If the firm's estimate is correct, the number of auditors' documented worries about their clients' viability will reach the highest level this decade.
In 2001, 19.2% of companies noted their auditors' going-concern uncertainty. But only 15% had those qualifications in 2003, according to the Audit Analytics report. For 2007 10-Ks, that number rose to 20.9%, reflecting the highest number of going-concern doubts since 2000. Now the total could reach 23.4% percent, the firm's researchers say.
The audit profession has been predicting a surge in the number of going-concern doubts since last fall, when auditors were on the verge of beginning their annual reviews for calendar year-end companies amid the rough economy. Last month, on the heels of General Motors revealing its auditors' going-concern doubts, Grant Thornton CEO Ed Nussbaum told CFO.com there will be "an unprecedented number of going-concern footnote disclosures and clarification from the auditors" forthcoming.
Auditors must consider several factors during their annual client reviews that may signal that a company won't be in existence 12 months from now. Among them: negative recurring operating losses, working capital deficiencies, loan defaults, unlikely prospects for more financing, and work stoppages. Auditors also consider such external issues as legal proceedings and the loss of a key customer or supplier.
Auditors' going-concern evaluations don't stop there. If they have doubts about a company's future, they tend to confer with their client's management and review the company's plans for overcoming the problems noted and decide whether those plans can likely keep the company in business. If they still aren't satisfied, then the auditors will explain why they have "substantial doubt" about the company's ability to stay a going concern in an opinion filed with the company's 10-K.
In late March, when Audit Analytics compiled the data, only 10,895 auditor opinions had been filed for year-end 2008 with the SEC. That means that Audit Analytics' forecast could be off, since the data doesn't account for about 5,000 10-Ks that were still due. Still left to be collected was data from smaller companies, late filers, and foreign filers. But it's likely that companies that have missed the SEC's filing deadlines are dealing with financial issues, possibly involving discussions over a going-concern qualification with their auditors, suggests Don Whalen, research director at Audit Analytics.
To be sure, what the findings mean has yet to be determined . Still unclear is whether audit firms are being more conservative in their forecasts because regulators have indicated they will keep a close watch on going-concern opinions.
Or is it a fact that a higher number of companies have a seriously uncertain financial future? "I'm not really sure what's driving this," Whalen says. "Obviously, there's a lot of economic pressure right now with the credit crunch and the dearth in consumer spending. At the same time, it might be that ... auditors are being a little more cautious in their assumptions."
Accounting firms have been criticized for not reliably raising going-concern red flags for investors before their clients file for bankruptcy protection. Past academic studies have found audit firms have made going-concern qualifications for just over half of the companies that eventually go bankrupt, according to Joseph Carcello, a University of Tennessee professor.
Last fall, in a practice alert, the Public Company Accounting Oversight Board warned auditors that companies' ability to stay viable during the economic downturn would likely slide — effectively putting audit firms on notice that this would be at least one area high on the radar of PCAOB inspectors in the coming year. Further, the board is revising its going-concern rules to align them more with those of the Financial Accounting Standards Board.
Audit Analytics hasn't analyzed whether certain kinds of firms were more likely to issue going-concern opinions than others. Whalen noted, however, that smaller audit firms as well as larger ones have expressed doubts about their clients' viability. "The smaller audit firms are not shying away," he says.
LINK (http://www.cfo.com/printable/article.cfm/13525910)
Surf's up! Kawabunga, dudes! ;)
Make sure you have on your flotation device. :rolleyes:
Richard's $.02 :munchin
On another note, I am nearly finished fencing my goat property. Now I can offer you cabrito with your black-eyed peas, cornbread, and jalapenos.
Don't forget the guacamole and Shiner Bock! ;)
Richard's $.02 :munchin
I found this to be interesting - especially the part about Japan.
Maybe we'll see interest rates go up? I recall 7% municipal bonds...ahh, those were the days. :)
Maybe I should start looking at chicken plucking theory for when I relocate to Rangertab1's AO? ;)
The capital well is running dry and some economies will wither
The world is running out of capital. We cannot take it for granted that the global bond markets will prove deep enough to fund the $6 trillion or so needed for the Obama fiscal package, US-European bank bail-outs, and ballooning deficits almost everywhere.
By Ambrose Evans-Pritchard
Last Updated: 8:49AM BST 26 Apr 2009
Unless this capital is forthcoming, a clutch of countries will prove unable to roll over their debts at a bearable cost. Those that cannot print money to tide them through, either because they no longer have a national currency (Ireland, Club Med), or because they borrowed abroad (East Europe), run the biggest risk of default.
Traders already whisper that some governments are buying their own debt through proxies at bond auctions to keep up illusions – not to be confused with transparent buying by central banks under quantitative easing. This cannot continue for long.
Quantitative easing: how it aims to prevent a new Great Depression
Gilt buyers back after shock failed auctionCommerzbank said every European bond auction is turning into an "event risk". Britain too finds itself some way down the AAA pecking order as it tries to sell £220bn of Gilts this year to irascible investors, astonished by 5pc deficits into the middle of the next decade.
US hedge fund Hayman Advisers is betting on the biggest wave of state bankruptcies and restructurings since 1934. The worst profiles are almost all in Europe – the epicentre of leverage, and denial. As the IMF said last week, Europe's banks have written down 17pc of their losses – American banks have swallowed half.
"We have spent a good part of six months combing through the world's sovereign balance sheets to understand how much leverage we are dealing with. The results are shocking," said Hayman's Kyle Bass.
It looked easy for Western governments during the credit bubble, when China, Russia, emerging Asia, and petro-powers were accumulating $1.3 trillion a year in reserves, recycling this wealth back into US Treasuries and agency debt, or European bonds.
The tap has been turned off. These countries have become net sellers. Central bank holdings have fallen by $248bn to $6.7 trillion over the last six months. The oil crash has forced both Russia and Venezuela to slash reserves by a third. China let slip last week that it would use more of its $40bn monthly surplus to shore up growth at home and invest in harder assets – perhaps mining companies.
The National Institute for Economic and Social Research (NIESR) said last week that since UK debt topped 200pc of GDP after the Second World War, we can comfortably manage the debt-load in this debacle (80pc to 100pc). Variants of this argument are often made for the rest of the OECD club.
But our world is nothing like the late 1940s, when large families were rearing the workforce that would master the debt. Today we face demographic retreat. West and East are both tipping into old-aged atrophy (though the US is in best shape, nota bene).
Japan's $1.5 trillion state pension fund – the world's biggest – dropped a bombshell this month. It will start selling holdings of Japanese state bonds this year to cover a $40bn shortfall on its books. So how is the Ministry of Finance going to fund a sovereign debt expected to reach 200pc of GDP by 2010 – also the world's biggest – even assuming that Japan's industry recovers from its 38pc crash?
Japan is the first country to face a shrinking workforce in absolute terms, crossing the dreaded line in 2005. Its army of pensioners is dipping into the collective coffers. Japan's savings rate has fallen from 14pc of GDP to 2pc since 1990. Such a fate looms for Germany, Italy, Korea, Eastern Europe, and eventually China as well.
So where is the $6 trillion going to come from this year, and beyond? For now we must fall back on the Fed, the Bank of England, and fellow central banks, relying on QE (printing money) to pay for our schools, roads, and administration. It is necessary, alas, to stave off debt deflation. But it is also a slippery slope, as Fed hawks keep reminding their chairman Ben Bernanke.
Threadneedle Street may soon have to double its dose to £150bn, increasing the Gilt load that must eventually be fed back onto the market. The longer this goes on, the bigger the headache later. The Fed is in much the same bind. One wonders if Mr Bernanke regrets saying so blithely that Washington can create unlimited dollars "at essentially no cost".
Hayman Advisers says the default threat lies in the cocktail of spiralling public debt and the liabilities of banks – like RBS, Fortis, or Hypo Real – that are landing on sovereign ledger books.
"The crux of the problem is not sub-prime, or Alt-A mortgage loans, or this or that bank. Governments around the world allowed their banking systems to grow unchecked, in some cases growing into an untenable liability for the host country," said Mr Bass.
A disturbing number of states look like Iceland once you dig into the entrails, and most are in Europe where liabilities average 4.2 times GDP, compared with 2pc for the US. "There could be a cluster of defaults over the next three years, possibly sooner," he said.
Research by former IMF chief economist Ken Rogoff and professor Carmen Reinhart found that spasms of default occur every couple of generations, each time shattering the illusions of bondholders. Half the world succumbed in the 1830s and again in the 1930s.
The G20 deal to triple the IMF's fire-fighting fund to $750bn buys time for the likes of Ukraine and Argentina. But the deeper malaise is that so many of the IMF's backers are themselves exhausting their credit lines and cultural reserves.
Great bankruptcies change the world. Spain's defaults under Philip II ruined the Catholic banking dynasties of Italy and south Germany, shifting the locus of financial power to Amsterdam. Anglo-Dutch forces were able to halt the Counter-Reformation, free northern Europe from absolutism, and break into North America.
Who knows what revolution may come from this crisis if it ever reaches defaults. My hunch is that it would expose Europe's deep fatigue – brutally so – reducing the Old World to a backwater. Whether US hegemony remains intact is an open question. I would bet on US-China condominium for a quarter century, or just G2 for short.
Things have become so bad even people who have nothing to do with O-bee's administration aren't paying their taxes. :rolleyes:
Richard's $.02 :munchin
I'm not all that smart, either, but I'll go from wary to worried when a truckload of Americans gets caught sneaking into Mexico. ;)
Richard's $.02