When will our creditors come knocking

[nmap]

Please see the attached PDF, particularly pages 3-4.

It suggests that certain indicators point to negative GDP growth in the third quarter. For now, we're a safe-haven, since the dollar looks far better than the Euro. How long that favorable condition will last remains an open question.

[GratefulCitizen]

Originally Posted by nmap

Please see the attached PDF, particularly pages 3-4.

It suggests that certain indicators point to negative GDP growth in the third quarter. For now, we're a safe-haven, since the dollar looks far better than the Euro. How long that favorable condition will last remains an open question.

Growth is indeed the issue.
If you believe growth is doomed (say, by peak oil ), then it's probably time to fortify against zombie attack.

Don't believe trade balance is the problem (or solution).
In the linked spreadsheet, on "line 74" the "annual" tab, there is a history of our trade balance.
http://www.bea.gov/international/xls/table1.xls

There was a period of adjustment after going to fiat currency.
From 1981-1989, there was a massive trade deficit, yet we were still prosperous.

Much of that deficit was with Japan.
How'd that work out for them, for us?

It's not a zero-sum game.
New wealth is continually being created.

The trade balance improved from 2008 to 2009.
I believe this was a consequence of a bad economy.

Was chatting with a friend about the trade balance issue; he has an interesting point:
If push came to shove, for how much can an F-16 be sold? (the F-16 currency standard)

We have a massive reserve of actual wealth in this country.


IMO, the world is on the downslope of "peak government".
Attempts by any nation to grow government will only result in a shrinking economy.

The solution is simple (though not easy): reduced taxation, reduced government spending (relative to the economy), and a reduction in barriers to trade (internal and external).

There are only two states of nature: growth and decay.

[nmap]

Knock, knock.

Caution: Material not suitable for those with sensitive natures.

Chart

Growth? Growth!?! Growth.

[abc_123]

Originally Posted by nmap

Knock, knock.

Caution: Material not suitable for those with sensitive natures.

Chart

Growth? Growth!?! Growth.

Bet we don't see the WH press secretary throw up that graph to talk to!

[Paslode]

Originally Posted by Broadsword2004

One thing on trade balance is there is a notion among many that a trade deficit is a bad thing. This is highly debatable. For example, the last time we ran a trade surplus was during the Great Depression.

Trade deficit is not the same thing as a budget deficit. It's like the terms strong dollar versus weak dollar. Many thing a weak dollar is a bad thing. Again, that depends. A stronger currency will in fact enlarge the trade deficit because it makes our exports more expensive. A weaker currency shrinks the trade deficit because it makes our exports cheaper for other nations.

Maybe over the long a Trade Deficit leads to a Budget Deficit? Because if you are purchasing more than you sell your going to run out of money. Basic farming, if you produce less and consume more you'll end up starving.

Weaker currency shrinks the trade deficit sounds like the salesmen selling product 5-10% over cost when carrying cost is 25%.... 'Frank, we'll make it up in volume'. Works a-okay for them as long as things are rocking and rolling your good to go on the float, but when it gets slow it takes a lot more effort to make ends meet.

To make all those deficits work, you have to cut somethings....wages, benefits, commissions, jobs and increase prices and taxes. Since the dollar is devalued it takes more dollars to live. Which means Joe Average makes less and can afford less.

[nmap]

So, logically, we should seek a very cheap dollar. Then we can export...but everything we buy, and everything our citizens buy, is more expensive. Food, gasoline, clothing - it all gets more expensive. So a cheap dollar will reduce our people's standard of living, will it not?

Of course, if we can do this, so can (and should) everyone else. So as the dollar declines, other nations should do likewise - for the same reasons. Perhaps this is why China has tied the value of the Yuan to the dollar so that every time we devalue, they do, too.

If we follow this to its end, the dollar will be essentially worthless. Those who save will find their frugality rewarded with a loss of purchasing power. So we should spend and spend, go into debt, and never save a dime. Clearly, many have taken this message to heart. As we import consumer goods...most of which will be in the landfill in a few years or less...we also incur debt which will outlast the goods. That should have an interesting outcome.

On a completely unrelated note...gasoline used to be 35 cents per gallon, sometimes less during a "gas war". You could buy good hamburger at 20 cents per pound. Isn't devaluation grand?

[Paslode]

Originally Posted by Broadsword2004

That would be if the government itself was doing the purchasing and the selling (which in a sense it already is doing). The government currently spends more than it takes in, so it runs a budget deficit. Trade deficits are a result of individual businesses and people buying and selling to other individual businesses and people. It just means we as a people import more than we export (even though we export a ton of stuff).



What I mean is that when the dollar is worth multiple Euros let's say, European exports are more attractive, because a dollar gets you more than one Euro. Similarly, American exports are not attractive to the Europeans, because they need more than one Euro to purchase $1 worth of American goods.

This hurts American manufacturing. With a weak dollar, it is the opposite: our exports become more attractive, while European exports become less attractive. So a strong dollar or weak dollar have their benefits and minuses.

There is a equilibrium where all that will function as you described, the problem I see is as you stated 'That would be if the government itself was doing the purchasing and the selling (which in a sense it already is doing).'

[nmap]

Originally Posted by Broadsword2004

No no, I'm not saying we should seek a cheap dollar. I am just saying that there are both pluses and minuses to a cheap and a strong dollar. A strong dollar contributes to a growing trade deficit but more buying power. A weak dollar contributes to a trade surplus (or a shrinking trade deficit), but less buying power.

There are a great many who agree. Perhaps you and they are right.

On the other hand, this LINK goes to a Forbes article with a variety of arguments that favor a strong dollar.

In essence - a weak dollar may produce favorable short-term results but at the cost of long-term problems.

Clearly, YMMV.

[nmap]

What's a few trillion between friends? I'm sure our creditors, such as China, will be very understanding and kind....


LINK

U.S. debt to rise to $19.6 trillion by 2015
WASHINGTON
Tue Jun 8, 2010 7:20pm EDT
(Reuters) - The U.S. debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015, according to a Treasury Department report to Congress.

U.S.

The report that was sent to lawmakers Friday night with no fanfare said the ratio of debt to the gross domestic product would rise to 102 percent by 2015 from 93 percent this year.

"The president's economic experts say a 1 percent increase in GDP can create almost 1 million jobs, and that 1 percent is what experts think we are losing because of the debt's massive drag on our economy," said Republican Representative Dave Camp, who publicized the report.

He was referring to recent testimony by University of Maryland Professor Carmen Reinhart to the bipartisan fiscal commission, which was created by President Barack Obama to recommend ways to reduce the deficit, which said debt topping 90 percent of GDP could slow economic growth.

The U.S. debt has grown rapidly with the economic downturn and government spending for the Wall Street bailout, the wars in Afghanistan and Iraq and the economic stimulus. The rising debt is contributing to voter unrest ahead of the November congressional elections in which Republicans hope to regain control of Congress.

The total U.S. debt includes obligations to the Social Security retirement program and other government trust funds. The amount of debt held by investors, which include China and other countries as well as individuals and pension funds, will rise to an estimated $9.1 trillion this year from $7.5 trillion last year.

By 2015 the net public debt will rise to an estimated $14 trillion, with a ratio to GDP of 73 percent, the Treasury report said.

[GratefulCitizen]

The solution to our economic woes is the same formula which created economic prosperity in the first place:
Economic freedom.

John Stossel has some nice points on the matter:

http://townhall.com/columnists/JohnS...free_to_choose

America's current struggles notwithstanding, life here is pretty good. We have a standard of living that's the envy of most of the world.

Why did that happen? Prosperity isn't the norm. Throughout history and throughout the world, poverty has been the norm. Most of the world still lives in dire poverty. Of the 6 billion people on earth, perhaps 1 billion have something close to our standard of living. Why did America prosper when most of the people of the world are still poor?

Milton Friedman taught me the answer. More than any other American, Friedman, who won the Nobel Prize in economics in 1976, clearly warned the world about the unintended consequences of big government.

"We've become increasingly dependent on government," said Friedman. "We've surrendered power to government; nobody has taken it from us. It's our doing. The results -- monumental government spending, much of it wasted, little of it going to the people whom we would like to see helped."

That's from Friedman's PBS TV series "Free to Choose," which aired 30 years ago and became the basis of his No. 1 bestseller by the same name. We'll celebrate the anniversary of "Free to Choose" on my Fox Business show tomorrow night.

The title says a lot. If we are free to make our own choices, we prosper. That was a new idea to many back then. At the time -- when inflation and interest rates were in double digits and unemployment approached 10 percent -- people thought a wise government could ensure economic growth, guarantee full employment and eliminate poverty. Friedman explained that the opposite was true, that bigger government had brought us "burdensome taxes, high inflation, a welfare system under which neither those who receive help nor those who pay for it are satisfied. Trying to do good with other people's money simply has not worked."

No, it hasn't. So why, 30 years later, is America doing so much more of it?

Because people still have not learned Friedman's lesson.

Because of that, I give money to a charity that offers teachers free copies of some of my TV news videos that explain the benefits of free markets. The video most popular in high schools is one in which I ask students, "When so many nations remain poor, why did America become prosperous?" Many answer, "Because we have democracy." Yet India has democracy, and India has been poor for years. "India is overpopulated," they say. They don't know that India has the same population density as New Jersey.

Other students suggest that America prospered because of our natural resources. But Hong Kong has no natural resources. It's basically a rock. It is also more densely populated than India. Yet, in just 50 years, Hong Kong went from poverty to American levels of wealth.

How? In "Free to Choose," Friedman explained that it was the free market. Overlooking the amazing Hong Kong skyline, he said: "This miracle hasn't been achieved by government action -- by someone sitting in one of those tall buildings and telling people what to do. It's been achieved by allowing the market to work."

Walking down a crowded street, he added, "They are free to buy from whom they want, to sell to whom they want, to work for whom they want.

Sometimes it looks like chaos, and so it is, but underneath it's highly organized by the impersonal forces of a free marketplace."

At the time of his series, India was a symbol of enlightened central planning.

"India has tremendous economic and human potential," Friedman commented. "The human tragedy is that in India that potential has been stifled by the straightjacket imposed by an all-wise and paternalistic government. Central planning has condemned India's masses to poverty and misery." What counted most for Friedman was that people should be free to try innovative ideas and succeed ... or fail.

"The free market enables people ... to trade with whomever they want; to buy in the cheapest market around the world; to sell in the dearest. ... (B)ut most important of all: If they fail, they bear the cost."

"Most important of all." It's clear what he would have thought of today's government bailouts.

"Government is not the solution to our problem, government is the problem."
-Ronald Reagan

http://www.youtube.com/watch?v=zqAgm...eature=related

[GratefulCitizen]

Deflation is knocking...

http://www.google.com/hostednews/ap/...ZBSPAD9GCD0T80

WASHINGTON — Wholesale prices fell for a second straight month in May, the first time that has happened in a year, reflecting big declines in the cost of energy and food.

The Labor Department said Wednesday that wholesale prices dropped 0.3 percent in May following a 0.1 percent decline in April. Core inflation, which excludes energy and food, rose 0.2 percent. Core prices are up just 1.3 percent over the past 12 months.

The continued absence of inflationary pressures means that the Federal Reserve, which meets next week, can keep interest rates low to provide support for the economic recovery.

Many economists believe the Fed will not start raising rates until sometime next year, believing that the severe recession of 2007-2008 will keep inflation a no-show for the rest of this year.

"A still-considerable amount of excess capacity in the economy will keep price pressures modest," predicted Jennifer Lee, senior economist at BMO Capital Markets.

Paul Ashworth, senior U.S. economist at Capital Economics, said that upcoming inflation reports should show continued price moderation, reflecting the big declines occurring in gasoline and other energy prices.

Ashworth said even with the price declines there was no danger that the country would topple into a period of sustained deflation, something not seen in the United States since the Great Depression of the 1930s.

In May, energy prices fell 1.5 percent, the biggest drop since a 2.2 percent decline in February. Gasoline prices were down 7 percent while home heating oil fell 7.4 percent and residential natural gas was down 1.1 percent.

The lower prices reflect a continued decline in global oil prices which have been falling because of concerns that the European debt crisis will dampen growth prospects in a key region of the world.

Falling energy costs are expected to keep inflation low in June as well, given that gasoline costs in June are down significantly from a month ago. The nationwide average for regular gasoline is $2.70 currently, down from $2.87 a month ago, according to AAA's Daily Fuel Gauge Report.

Food costs dropped 0.6 percent, the biggest decline since a 1.3 percent fall in July of last year. The decreases were led by an 18 percent drop in the cost of fresh vegetables, a category where prices had been driven higher because of damaging freezes earlier in the year in Florida.

The 0.3 percent drop in the overall inflation rate for Labor's Producer Price Index was slightly less than the 0.5 percent decline economists had expected while the 0.2 percent rise in core inflation compared to a forecast 0.1 percent increase.

Core prices were driven up in May by a 2.5 percent increase in the price of cigarettes, the biggest gain since last November. The cost of light trucks, a category that includes sport utility vehicles, rose 0.8 percent, the biggest increase since a 1.9 percent rise in January, and a 0.4 percent increase in the price of airplanes.

The PPI measures inflation pressures before they reach the consumer. Economists are also anticipating tame inflation at the consumer level as well.

Economists surveyed by Thomson Reuters forecast that overall inflation at the retail level will decline 0.2 percent when that report is issued Thursday. Core inflation, excluding energy and food, is expected to post a 0.1 percent increase. That would mean core consumer inflation is up 0.9 percent over the past year, below the Federal Reserve's target for inflation.

The absence of core inflationary pressures has given the Fed room to cut a key interest rate to a record low of 0.00 to 0.25 percent, helping to promote borrowing as the economy emerges from the worst recession in decades.

The severe downturn forced more than 8 million workers out of jobs and put a lid on salary increases. Also businesses have found it hard to boost prices in the face of slack demand.

Recently returned to Denver on business, didn't know things were so tough.

[GratefulCitizen]

Money from helicopters...

http://www.forbes.com/2010/06/22/ber...mepagechannels

The Federal Open Market Committee meets Tuesday to discuss its record-low interest rate policy. The announcement of the decision will be released on Wednesday. While no increase in interest rates is expected, there is little doubt among investors that the future direction for the central bank’s target rate will be up. In fact, Kansas City Federal Reserve President Thomas Hoenig has repeatedly expressed his desire to increase overnight lending rates to 1% from the current zero to 0.25% range by the end of summer.

At the same time, however, recent economic data--including the Philly Fed Index, first-time jobless claims and retail sales--are already pointing to a probable double-dip recession. Therefore, the Fed’s next move is more likely an easing than a tightening of rates.

The ease won’t come in any of the traditional forms. If the Fed were to reduce rates to a negative level, it would result in a politically unpalatable situation where depositors are charged to put their money into a bank. Nor will our central bank seek once again to dramatically increase the size of its balance sheet. Although the Fed bought another $7.34 billion in mortgage-backed securities last week, even Chairman Ben Bernanke won’t be foolish enough to buy up another $1.5 trillion of assets that he will not be able to dispose of in the future.

The Fed’s likely ease will involve zero interest on excess reserves: Since October 2008 the Fed has been paying interest on commercial bank deposits held at the central bank. But because of Bernanke’s fears of deflation, he will do whatever it takes to increase the money supply. With rates being near zero and the Fed’s balance sheet already at an intractable level, the only viable solution to fight Ben’s phantom deflation fear is for him to remove the impetus on the part of banks to keep their excess reserves laying fallow at the Fed.

If commercial banks stop being paid to keep their money dormant, they will find a way to get money out the door. They may even start shoving loans out through the drive-up window. Banks need to make money on their deposits (liabilities). If they don’t get paid by the Fed, they will be forced to take a chance on the consumer. After all, it has been made clear to them that the Fed and Treasury stand ready to bail out banks’ bad assets at any cost. So why not take a chance once again?

Following this month’s meeting, the FOMC is unlikely to indicate that the Fed will stop paying interest on commercial bank deposits. However, in the near future this strategy will be the most appealing method for the Fed to increase liquidity. Once Mr. Bernanke assents to the double-dip recession scenario, he will fight deflation by any means necessary.

Don't think it will work.

[GratefulCitizen]

And there it is...

The fed is terrified of deflation.
Keep the printing presses operating at full speed.

http://www.google.com/hostednews/ap/...xHSxwD9GH740G4

WASHINGTON — The Federal Reserve struck a more cautious tone about the strength of the U.S. economic recovery, indicating Europe's debt crisis poses a risk to it.

Wrapping up a two-day meeting Wednesday, the Fed in a 9-1 decision retained its pledge to hold rates at record-low levels for an "extended period." Doing so is intended to energize the rebound.

The Fed expressed confidence that the recovery will stay intact despite threats from abroad and at home. But Chairman Ben Bernanke and his colleagues offered a slightly more reserved outlook than the last time they convened.

The Fed said the economic recovery is "proceeding." That was a bit less upbeat than the view at the April meeting when the Fed said economic activity continued to "strengthen." The Fed also said the labor market is "improving gradually."

While not mentioning Europe by name, the Fed said "financial conditions have become less supportive of economic growth ... largely reflecting developments abroad."

The fragile economic picture increases pressure on President Barack Obama and lawmakers in Washington. Near-double-digit unemployment is certain to factor into the way Americans vote in congressional midterm elections this fall. If it fails to come down after that, the jobless rate could play a significant role in the 2012 presidential election.

At the same time, the president has limited options. Congress has run into opposition on extending unemployment benefits and providing more aid to cash-strapped states. While some liberal Democrats maintain that government spending is the best way to stimulate the economy, a growing number of moderate and conservative Democrats share Republican concerns that the government's exploding budget deficits pose a greater risk.

The subtle shift in the Fed's outlook drew little reaction from stock investors. The Dow Jones industrial average was essentially flat after announcement.

The decision to keep rates at record lows boosted demand for safe-haven assets like Treasurys, sending interest rates lower. The yield on the 10-year Treasury note, a widely used benchmark for mortgages and other consumer loans, fell to 3.13 percent from 3.25 percent late Tuesday. The 10-year note hasn't closed at that level in more than a year. Rates had already fallen earlier in the day after the government said new-home sales dropped 33 percent last month.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for the fourth straight meeting was the sole member to dissent from the Fed's decision to retain the "extended period" pledge.

Hoenig fears keeping rates too low for too long could lead to excessive risk-taking by investors and feed new speculative bubbles in the prices of stocks, bonds and commodities.

He's also expressed concern that low rates could eventually unleash inflation. And Hoenig said he worries that keeping the "extended period" pledge will limit the Fed's stated "flexibility" to start modestly bumping up rates.

Given the risks to the recovery, the Fed left a key bank lending rate at between zero and 0.25 percent. The rate has remained at that level since December 2008.

That means rates on certain credit cards, home equity loans, some adjustable-rate mortgages and other consumer loans will remain low. Commercial banks' prime lending rate would stay at about 3.25 percent, the lowest point in decades.

Low rates serve borrowers who qualify for loans and are willing to take on more debt. But they hurt savers. Low rates are especially hard on people living on fixed incomes who are earning scant returns on their savings.

Still, if the rates spur Americans to spend more, they would help invigorate the economy. That's why the Fed maintained its pledge, in place for more than a year, to keep rates at record lows for an "extended period."

Because the fragile recovery is more vulnerable to shocks, from home and overseas, economists increasingly say the Fed probably won't start boosting rates until next year — or possibly into 2012. That's a change from a few months ago, when economists thought the Fed would begin raising rates at the end of this year.

"Increased market volatility and uncertainty on the economic outlook may cause the Fed to delay raising rates until well into next year," said Kurt Karl, chief U.S. economist at Swiss Re.

The Fed has leeway to hold rates at record lows because inflation is essentially nonexistent. In fact, the Fed noted that the price of energy and other commodities have dropped in recent months, and that underlying inflation has "trended lower." That seems to suggest that Fed policymakers are a bit more concerned about the remote prospect of deflation, versus inflation.

T.J. Marta, a market strategist at Marta on the Markets, called the Fed's policy statement "more dovish" and reinforces the belief that the central bank won't need to start boosting rates any time soon to fend off inflationary pressures.

After suffering the worst recession since the 1930s, the economy has been growing again for nearly a year. Manufacturing activity is picking up. Businesses are spending more. And Bernanke has expressed confidence that the nation won't fall back into a "double dip" recession.

Still, the strength of the recovery could be affected by the European debt crisis, an edgy Wall Street, cautious consumers, a fragile housing market and high unemployment.

If the U.S. recovery were to flash signs of a relapse, the Fed would likely take other steps to get it back on course. The Fed has left the door open to resuming purchases of mortgage securities, a move that would drive down mortgage rates and bolster the housing market. It ended a $1.25 trillion mortgage-buying program in March.

[nmap]

Support for a period of deflation. Another ray of sunshine for one and all.

Is he right? I have suggested that the level of debt is excessive, so I suppose that puts me on the opposite side. But his credentials are way better than mine.

LINK

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.