April 30, 2008
Elaine Meinel Supkis
Now we see the Federal Reserve drain its reserves which are Treasury DEBTS, of course. The US government has, as per usual, lied about budget matters and now it turns out we are running up to HALF A TRILLION in the red if not much worse. Congress is busy voting to spend more billions trying to run over Iran Kitty and control Iraq, our own Tar Baby from Hell. Half a trillion in US homeowner wealth has vanished into thin air. Or rather, the US government is busy turning it into government debts. This leads to bankruptcy. Of course, the Fed ignores raging inflation and drops interest rates another 25 points. Argentina is going bankrupt yet again and for the same reasons we are going bankrupt. Will we learn before it is too late? Nope.
Here is a graph I decorated. Click on the image to enlarge. The colors represent interest rate levels. The red line is the real inflation rate. It is obvious that we are in very great trouble and the 'cures' of the late 1970's to the early 1980's, courtesy of Volcker, may have killed inflation only for a while. Not permanently.
Note the red arrow pointing to the inflation rate red line in both 1976 and 2003: These two times are the only two times in the last 60 years that the real inflation rate has been over 500 points higher than the official interest rates. There are several significant periods when the Fed dropped interest rates below the rate of real inflation: In 1960, to boost the economy and thus show Commie Russia and Commie China that we were a worker's paradise, in 1972 when Nixon pretended to be ending the Vietnam War via kissing Commie Chinese ass, in the mid seventies we had 'stagflation' as the price of everything we needed to eat or use shot way up in price, then we had another session of fake interest rates after the Gulf War I victory. Then there was 'stability'. This was supposedly a time when inflation was 'under control'.
Government spending dropped, for example. But was our economy healthy? Or DYING? Unfortunately, it was dying. Our trade deficit which began during the fake interest rate regime under Nixon, took off! So did the stock market. When the stock market bubble popped, rates went far, far below the rate of real inflation. The infamous Housing bubble ballooned. Rates were shoved upwards rapidly to deal with the flood of red ink from the US government and our consumer economy. We ran up over $4 trillion in government debt AND another $4 trillion in trade deficits. Nearly $10 trillion in all! This has only one end: bankruptcy.
So the Fed, today, voted to drop interest rates to the cellar where it last was, in a realistic sense, during Eisenhower. When we were a creditor nation and had an industrial base. Looking at this chart, I must say, we will see DOUBLE the hyperinflation of the 1975-1985 decade if the Fed keeps dropping rates and keeps them low in a misguided and insane effort in preventing Wall Street from panicking.
Paul L. Kasriel
It sure is a good thing that $150 billion of checks from the IRS are in the mail to U.S. households because these same households experienced an evaporation in paper wealth in February to the tune of about $544 billion according to my admittedly back-of-the-envelope arithmetic. It was reported today that the Case-Shiller house price index for 20 major metropolitan areas fell 2.66% month-to-month in February. Applying that percentage decline in house prices to the fourth- quarter value of $20,154.7 billion for household residential real estate from the Fed’s flow-of- funds data yields a decline of $536 billion. Now, this is a very rough approximation for at least two reasons. Firstly, the Case-Shiller price index is for only 20 metropolitan areas, not the whole country. So, the Case-Shiller index captures the decline in house prices in the Manhattan, New York area but not the Manhattan, Kansas area. Second, the value of residential real estate in the Fed’s flow-of-funds accounts is based on the OFHEO house price index. But even with these qualifications, I feel confident in saying that the value of households’ residential real estate assets fell in February by some multiple of the aggregate value of the checks households will receive as part of the Economic Stimulus Act of 2008.
This stupid, ridiculous hand out designed to keep people spending: it is insane. It is stupid. It is a hand out. It is America the Welfare Queen From Hell time. It is also bankrupting the nation. Right now, our stupid geniuses who came up with this obvious scam are running in circles, screaming, 'Who, who, WHO is going to buy all our bonds we must issue to cover the gaping Federal deficits?' Of course, if Ron Paul suggests we stop spending $109 billion bombing Sadr City, the media and our flag pin lapel wearing political operatives will go nuts. 'Traitor! Treason!' they will shout. 'Ron Paul is a nut. He isn't serious! We are serious!'
So it goes: Hillary Clinton and McCain who are two warmongering peas in a pod people plant, both are suggesting we no longer collect gasoline taxes! This will free up money, as ABC TV said tonight, 'So people can buy FOOD!' My god. The head spins! I saw on TV all these big, fat, SUVs sucking down huge amounts of gasoline. Since we decided to ignore reality for two decades, we are stuck with these behemoths. I always bought gas misers. I loved my little Geo Metro. Drove it for over 200,000 miles at 55 miles to the gallon. A very unpopular car over here.
Americans don't want to make any serious changes. Everyone with gas guzzling monsters should park them and start carpooling or riding bikes or walking, god forbid. And if they can't do this, they should ditch these ridiculous machines and buy cheap, used Geo Metros. Actually, I sold mine! The kid rebuilt it. Still runs. The point is, we can't have endless gas. This is bankrupting America. It is making our trade deficit stink to high heaven. It is treason. It weakens our nation and anyone driving these things should reflect on how they have destroyed our great nation, all so they could drive about arrogantly and hassle little Geo Metro drivers.
This graph is from the above article. It shows how our 'wealth' ballooned and now how it is vanishing. Like all good housing bubbles, it will totally vanish over the years. This is simple: no balloon survives if it makes housing cost much more than incomes can afford. And incomes are doing badly. The false hopes of super-low interest rates can create bubbles despite bad income growth. But only once every 20 years. It can't do this over and over again every three years. So back to the top chart: the Fed tried this trick in the seventies. Each time, they would panic and set very high interest rates. Then it would drop like a rock. But inflation would surge violently so the Fed would play catch up. Only when Volcker put down his foot and raised rates FASTER than inflation, did this stop.
I say, why do we have to learn this obvious lesson the hard way, any way? Can't Bernanke read graphs?
The Fed’s action, lowering short-term rates to 2 percent from 2.25 percent, followed new indications that the American economy remained fragile, expanding by 0.6 percent on an annualized basis in the first quarter, not an overall downturn that would have indicated a full recession had begun.
The poor record of economic growth, reported by the Commerce Department on Wednesday morning, reflected what most Americans have been experiencing since late last year — declines in consumer spending, housing prices and business investment, along with spreading unemployment.
Wall Street gave up sharp gains after the Federal Reserve announcement. The Dow Jones industrial average, which was up about 120 points and moved higher after the announcement, was up less than 30 points about an hour later.
Wednesday’s interest rate action was accompanied by a parallel decision to lower the Fed’s discount rate, the rate the Fed charges banks and thrift institutions, from 2.50 percent to 2.25 percent.
I sense fear on the streets. I certainly see fear all around me in stores, at gas stations, in the schools, everywhere, people notice inflation is eating away at our precious funds. They know deep down, that the present 2% rate of the Fed is utterly, totally insane and will only make inflation worse. The older people my age and older know perfectly well, what the cure is. But people hate this and want free Funny Money™. People who are savers are hoping Volcker will throw Bernanke from a helicopter, take over and repeat what he did in the past. Buying bonds that have an 18% return is GREAT if one is a saver! Right now, savings are collapsing since one makes more money by borrowing rather than saving.
“My view is that the Fed is back doing the silly things it did in the 1970s, of trying to make judgments that have long-term consequences based on short-term data,” said Allan H. Meltzer, professor of political economy at Carnegie Mellon University. “It should get back to the period of 1985 to 2003 known as the Great Moderation.”
The Fed’s recent move, coupled with the uncertain performance of the economy, appeared likely to deepen the partisan impasse in Washington over how to respond to joblessness, the mortgage crisis, energy costs and other problems.
Meltzer is like Volcker: he remembers things. He knows better. He can read graphs. He can grasp reality. Bravo. I am glad the Times is quoting people like these two. By the way, the 1985-2003 period was NOT moderate at all. It saw our economic state collapse! GAH! Why can't they see the obvious? Why? Why???
The US trade deficit grew worse and worse. The budget deficit went from $1 trillion to $6 trillion during that time. Interest rates moderated because we stopped inflation via the method of OUTSOURCING AND OFFSHORING our economy! And even with all this, the US had to devalue the dollar via the Plaza Accords and the Louver Accords. Let's go to the White House official budget page
First: the numbers above are riddled with lies, evasions and fraud. The main thing is, we are in the red. And there is no end to the foolish choices being made from top to bottom.
The U.S. Treasury said on Wednesday it will resume issuing 52-week bills after a seven-year break, as budget deficits swell due to slowing revenues and higher spending in a sluggish economy.
The Treasury, announcing its quarterly refunding plans, said it would sell $21 billion of 10-year notes and 30-year bonds. It also said it would pay down about $53 billion of maturing debt in the auctions next week.
The Treasury retired the 52-week bills in February 2001, when the United States was running budget surpluses after a decade-long economic expansion.
It is now adding the bill to its debt offering lineup just one year after it retired the 3-year note amid better-than-expected tax revenues produced by booming corporate profits and capital gains.
The Japanese and Chinese just can't wait to buy these. Eh? They will buy ONLY if the US lets them flood us with exports and they gain a good profit return. How will we do this if our own consumers are being consumed by inflation? Warning: here comes the Horns of Dilemma. We are trapped. We can't just inflate our way to happiness and wealth. We can't lure the nations destroying our industrial base into buying our bonds if we have rates that are 500 points below the real rate of inflation! As well as weakening the dollar tremendously. Japan has kept their own rates 700 points below the real rate of inflation. I read about various things like noodles or gasoline shooting up 40% in price this last six months over there! Noodles that went for 100 yen are now suddenly selling for 140 yen, just for example. Wages are falling and this is a terrible mess for the people there.
The Treasury cited spending on tax rebates associated with the government's $152 billion fiscal stimulus plan as a key reason for raising borrowing expectations over the next year.
The Treasury Borrowing Advisory Committee -- made up of 22 primary government bond dealers -- said in a report to the Treasury that a recent survey showed the deficit for fiscal 2008 will average a record $414 billion, with some economists forecasting the gap would exceed $500 billion -- more than tripling last year's $163 billion deficit.
In addition to lower revenues from a slowing economy and increased spending, the Federal Reserve has redeemed Treasury holdings and made some outright sales in recent months to support its efforts to boost financial market liquidity and ease the worst credit crisis in decades.
This has resulted in an additional $200 billion in bills and coupon issuances so far this fiscal year, the Treasury said. Municipal bond issuers are also buying fewer State and Local Government Series securities, or SLGS, forcing the Treasury to increase issuance of higher-yielding bills, notes and bonds.
The Treasury said it may also consider other moves such as increasing coupon issuance and reintroducing the 3-year note or other maturities, if borrowing needs continue to grow.
The banking collapse is now becoming the infinitely more dangerous government funding collapse. The Chinese are in a very foul mood right now and demanding they bankroll our $1600 hand out to all Americans while screaming about how terrible Chinese goods are means China won't buy our debts! Japan is selling, China won't buy. So who will? Argentina?
By Paul L. Kasriel
The non-partisan Congressional Budget Office is projecting that the fiscal year 2008 federal budget deficit will increase to $396 billion from $162 billion in fiscal year 2007. So, federal borrowing in this fiscal year is projected to be 2.4 times as much as last year. And on top of this increased federal borrowing, we now have the Federal Reserve providing $601 billion less support to the Treasury securities market at an annual rate. Is it any wonder why the yields on Treasury securities are rising now? You might want to put your IRS tax-rebate manna into some sort of saving account for your children so that they can pay the higher taxes needed to service the public debt that is being incurred to bailout imprudent borrowers and lenders in the recent housing bubble.
How can our official interest rate be 2% under these circumstances? Isn't it painfully obvious? I saw a TV commercial today. It was all about how people could get unsecured loans. Because I am a speed reader as well as typist, I was able to read the fine print at the bottom of the commercial that flashed on screen literally for less than a second. The rate was 99.25%. WOW. And we have no inflation? I guessed it would be 33% and that rate had me totally astonished! Talk about blatant usury. But then, the real cheats here are the Federal Reserve officers who think interest rates are all about goosing the economy, not tracking inflation. They can't say, 'We will notice inflation next year or maybe ten years from now.' It is very much 'now' now! Like in the movie, 'Spaceballs' by Mel Brooks.
Argentine bonds show growing speculation that the country will default for the second time this decade as inflation and anti-government protests swell.
The nation's $10.8 billion of floating-rate dollar bonds due in 2012 yielded 7.20 percentage points more than Treasuries of similar maturity at 5:43 p.m. in New York. That implies an almost 20 percent chance of Argentina halting payments in the next two years, according to Credit Suisse Group. No other emerging-market government securities have as high a probability of default.
The 19 percent decline in bond prices since President Cristina Fernandez de Kirchner took office in December shows investors are losing faith even as record commodity exports spur the longest economic expansion in at least two decades. Confidence waned after statisticians accused the government of fabricating data to hide an inflation surge and farmers alienated by a tax increase staged a nationwide strike that caused food shortages last month.
So, Argentina will collapse and go bankrupt because the government is lying about inflation? Oh my. The US gets away with this only due to foreign powers propping up our corrupt politicians who pull this exact same stunt here. But we can't do this forever. It is obvious after a decade of inflation lying, the lion of inflation has risen and is now stalking us. By the way, if Argentina goes belly up, this is going to drag us downwards, too. We are way too fragile with a dead banking system, to fake it much longer if other nations let go and fall off the cliff. THIS IS HOW THE GREAT DEPRESSION DEVELOPED.
Minsky, McCulley, El-Erian, Gross, Feldstein, Summers, and a host of others would likely argue that additional policy measures are required to support home prices which have fallen by 10% over the past 12 months and are set for a repeat by this time in 2009. Lower Fed Funds? They would, in PIMCO’s opinion, likely do more damage than good from this point forward. Foreign and domestic investors are being fleeced with negative real interest rates, and the weak dollar, stratospheric commodity prices and steadily rising import inflation are the result. The better alternative is to initiate a limited mark-to-market write-down of private mortgage debt as envisioned in the Dodd-Frank Congressional proposal combined with government-subsidized loans at below market rates. Look at it this way: you can allow a home to fall in price from $400,000 to $300,000 and force an upside-down "short sale" foreclosure, or you can reduce the homeowners’ $400,000 mortgage to $350,000, refinance the loan through the FHA at 4% and stabilize the neighborhood and its home prices. Surely Republicans, Democrats, AND Wall Street mortgage holders (PIMCO included) can recognize that stability as opposed to freefall market clearing is the better alternative, especially if the pain is shared by all parties. It is our best chance to cushion Minsky’s asset-based deflation.
The problem is, the vanishing wealth. No one in their right mind is going to put their money into anything that is losing value and this emphatically includes the dollar itself. No one giving advice or peering into the future can see reality if they refuse to understand that we are in a negative wealth cycle now in the West. And there is no magic charm or easy out. There is one and only one way out: to save money and work for profits which get plowed back into value-added labor output. Not Funny Money™ making schemes. But rather, real industrial output. I see Germany and Japan cutting back on industrial output. The last local factories here in Berlin, NY, my dying town, are cutting shifts and no longer running day and night but are running at a half staff. We can't be a nation of bankers, property flippers, gamblers and therapists. We have to produce something tangible and real. And the profits must be generated here, not fly off to Japan or Germany! And we will never save any money if interest rates are 500 points below the rate of inflation!