News What are the potential impacts of public confidence on the economy's recovery?

[Greg Bernhardt]

The DXY is sooooo depressing.

 

[russ_watters]

In the first 30 years of my life, the DJIA and other market indicators grew between 1.5 and 5.0 percenthttp://www.measuringworth.com/DJIA_SP_NASDAQ/result.php" . Following closely what I assume to be a normal 3 to 4 percent inflation rate.

Note that that's 5.0% after inflation. 10.3% before inflation (the dow), so that means that growth was lower and inflation higher than average during that time.

The market jumping 10 to 20 percent a year, for no comparative reason, for a decade, strikes me, as, um, irrational exuberance?

Well we're typically looking at absolute point values (not inflation adjusted), so multiple years of 10% growth are perfectly average. And since the market is cyclical, 15% or even a lot more is perfectly normal in good times. The "irrational exuberance" of the mid-90's included years in excess of 30% growth.

You're mixing before and after inflation numbers.

 

[WhoWee]

Note that that's 5.0% after inflation. 10.3% before inflation (the dow), so that means that growth was lower and inflation higher than average during that time. Well we're typically looking at absolute point values (not inflation adjusted), so multiple years of 10% growth are perfectly average. And since the market is cyclical, 15% or even a lot more is perfectly normal in good times. The "irrational exuberance" of the mid-90's included years in excess of 30% growth.

Now consider the effect of hyper-inflation.

This interview has been largely overlooked - since May.
http://online.wsj.com/article/SB124303024230548323.html
"In a speech at the Kennedy School of Government in February, he wrung his hands about "the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations" that "we at the Dallas Fed believe total over $99 trillion." In March, he is believed to have vociferously objected in closed-door FOMC meetings to the proposal to buy U.S. Treasury bonds."

 

[OmCheeto]

The DXY is sooooo depressing.

Um. I've yet to invest in the DXY. (never heard of it before this morning)

I've always thought it silly to value currency. But the D might be down enough to put a few billion dollars down on and make a few hundred million on the upswing... Bwah. Ahahahahahaha!

...


Ok, in reality, I'll make about 27 cents from what I can invest from my budget,

 

[mheslep]

Now consider the effect of hyper-inflation.

That article does not mention or even allude to hyper inflation. Perhaps you could be more specific.

 

[mheslep]

Cato's 2009 http://www.cato.org/pubs/efw/" (exhibit 1.2) is out. Interestingly Chile moved up to #5, ahead of the US. The US moved up from #8 last year.

2009

Hong Kong 1, Singapore 2, New Zealand 3, Switzerland 4, Chile 5, United States 6, Ireland 7, Canada 8, Australia 9, United Kingdom 9, Estonia 11, Denmark 12​

2008

Hong Kong 1, Singapore 2, New Zealand 3, Switzerland 4, United Kingdom 5, Chile 6, Canada 7, United States 8, Australia 8, Ireland 10, Estonia 11, Iceland 12, Denmark 13, Finland 14, Austria 15​

Comparisons are based on:
1 Size of Government
2 Legal System & Property Rights
3 Sound Money
4 Freedom to Trade Internationally
5 Regulation

US vs #1 Hong Kong
Score 0-10, (ranking) in each category
Hong Kong 9.3 (2) 8.2 (15) 9.5 (18) 9.6 (1) 8.3 (4)
United States 7.2 (41) 7.6 (22) 9.7 (4) 7.6 (28) 8.1 (7)

The US is particularly low in size of government. The indicators keeping the US anywhere near the top 10 are soundness of money and regulation.

 

[WhoWee]

That article does not mention or even allude to hyper inflation. Perhaps you could be more specific.

We have nearly doubled the money supply - inflation will follow.

http://www.shadowstats.com/alternate_data

The article makes reference to Argentina.
http://home.uchicago.edu/~gbecker/Businessweek/BW/2002/02_11_2002.pdf

 

[WhoWee]

This is a better look.
http://www.chartingstocks.net/2009/03/chart-of-the-us-money-supply-1917-2009/

 

[mheslep]

We have nearly doubled the money supply - inflation will follow.

http://www.shadowstats.com/alternate_data

The article makes reference to Argentina.
http://home.uchicago.edu/~gbecker/Businessweek/BW/2002/02_11_2002.pdf

Yes I know about the increase in the money supply, and the threat from inflation. You added the prefix hyper, which is a very different thing. It usually means inflation measured monthly, even daily, as opposed to annually. I know hyper inflation happened in Weimar Germany and Latin America. I don't know that it will happen in the US.

 

[WhoWee]

Yes I know about the increase in the money supply, and the threat from inflation. You added the prefix hyper, which is a very different thing. It usually means inflation measured monthly, even daily, as opposed to annually. I know hyper inflation happened in Weimar Germany and Latin America. I don't know that it will happen in the US.

I don't think it will happen in the US either. However, we know there are limits to the type of behavior that leads to such conditions - the real question is what are those limits?

 

[OmCheeto]

We have nearly doubled the money supply - inflation will follow.

http://www.shadowstats.com/alternate_data

The article makes reference to Argentina.
http://home.uchicago.edu/~gbecker/Businessweek/BW/2002/02_11_2002.pdf

Um. Shadowstats.com?

M3 is no longer published or revealed to the public by the US central bank. However it is estimated by the website Shadow Government Statistics.

 

[WhoWee]

Um. Shadowstats.com?

From the WSJ.

http://online.wsj.com/article/SB124458888993599879.html

"Get Ready for Inflation and Higher Interest Rates
The unprecedented expansion of the money supply could make the '70s look benign.

By ARTHUR B. LAFFER

Rahm Emanuel was only giving voice to widespread political wisdom when he said that a crisis should never be "wasted." Crises enable vastly accelerated political agendas and initiatives scarcely conceivable under calmer circumstances. So it goes now.

Here we stand more than a year into a grave economic crisis with a projected budget deficit of 13% of GDP. That's more than twice the size of the next largest deficit since World War II. And this projected deficit is the culmination of a year when the federal government, at taxpayers' expense, acquired enormous stakes in the banking, auto, mortgage, health-care and insurance industries.

With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilities of federal programs -- such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid -- are over the $100 trillion mark. With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.

But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.

About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.
[Our Exploding Money Supply]

The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base -- which prior to the expansion had comprised 95% of the monetary base -- has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!

Bank reserves are crucially important because they are the foundation upon which banks are able to expand their liabilities and thereby increase the quantity of money.

Banks are required to hold a certain fraction of their liabilities -- demand deposits and other checkable deposits -- in reserves held at the Fed or in vault cash. Prior to the huge increase in bank reserves, banks had been constrained from expanding loans by their reserve positions. They weren't able to inject liquidity into the economy, which had been so desperately needed in response to the liquidity crisis that began in 2007 and continued into 2008. But since last September, all of that has changed. Banks now have huge amounts of excess reserves, enabling them to make lots of net new loans.

The way a bank or the banking system makes new loans is conceptually pretty simple. Banks find an entity that they believe to be credit-worthy that also wants a loan, and in exchange for the new company's IOU (i.e., loan) the bank opens up a checking account for the customer. For the bank's sake, the hope is that the interest paid by the borrower more than makes up for the cost and risk of the loan. The recently ballyhooed "stress tests" on banks are nothing more than checking how well a bank can weather differing levels of default risk.

What's important for the overall economy, however, is how fast these loans are made and how rapidly the quantity of money increases. For our purposes, money is the sum total of all currency in circulation, bank demand deposits, other checkable deposits, and travelers checks (economists call this M1). When reserve constraints on banks are removed, it does take the banks time to make new loans. But given sufficient time, they will make enough new loans until they are once again reserve constrained. The expansion of money, given an increase in the monetary base, is inevitable, and will ultimately result in higher inflation and interest rates. In shorter time frames, the expansion of money can also result in higher stock prices, a weaker currency, and increases in commodity prices such as oil and gold.

At present, banks are doing just what we would expect them to do. They are making new loans and increasing overall bank liabilities (i.e., money). The 12-month growth rate of M1 is now in the 15% range, and close to its highest level in the past half century.

With an increased trust in the overall banking system, the panic demand for money has begun to and should continue to recede. The dramatic drop in output and employment in the U.S. economy will also reduce the demand for money. Reduced demand for money combined with rapid growth in money is a surefire recipe for inflation and higher interest rates. The higher interest rates themselves will also further reduce the demand for money, thereby exacerbating inflationary pressures. It's a catch-22.

It's difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed's actions because, frankly, we haven't ever seen anything like this in the U.S. To date what's happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn't a pretty picture.

Now the Fed can, and I believe should, do what it must to mitigate the inevitable consequences of its unwarranted increase in the monetary base. It should contract the monetary base back to where it otherwise would have been, plus a slight increase geared toward economic expansion. Absent this major contraction in the monetary base, the Fed should increase reserve requirements on member banks to absorb the excess reserves. Given that banks are now paid interest on their reserves and short-term rates are very low, raising reserve requirements should not exact too much of a penalty on the banking system, and the long-term gains of the lessened inflation would many times over warrant whatever short-term costs there might be.

Alas, I doubt very much that the Fed will do what is necessary to guard against future inflation and higher interest rates. If the Fed were to reduce the monetary base by $1 trillion, it would need to sell a net $1 trillion in bonds. This would put the Fed in direct competition with Treasury's planned issuance of about $2 trillion worth of bonds over the coming 12 months. Failed auctions would become the norm and bond prices would tumble, reflecting a massive oversupply of government bonds.

In addition, a rapid contraction of the monetary base as I propose would cause a contraction in bank lending, or at best limited expansion. This is exactly what happened in 2000 and 2001 when the Fed contracted the monetary base the last time. The economy quickly dipped into recession. While the short-term pain of a deepened recession is quite sharp, the long-term consequences of double-digit inflation are devastating. For Fed Chairman Ben Bernanke it's a Hobson's choice. For me the issue is how to protect assets for my grandchildren.

Mr. Laffer is the chairman of Laffer Associates and co-author of "The End of Prosperity: How Higher Taxes Will Doom the Economy -- If We Let It Happen" (Threshold, 2008). "

 

[OmCheeto]

From the WSJ.

http://online.wsj.com/article/SB124458888993599879.html

"Get Ready for Inflation and Higher Interest Rates
The unprecedented expansion of the money supply could make the '70s look benign.

By ARTHUR B. LAFFER

Interesting that the first 20 google hits for "exploding money supply" are all dated around the time of Mr. Laffer's article. March thru June of 2009. It seems no one is talking about it any more. It's almost like the pork barrel for arrow makers incident. Everyone jumps on the "ditto" bandwagon, plagiarizes someone else's article, and it's pat each other on the back time. Then someone figures out that the tripe they were predicting didn't come true. Then no one talks about it anymore. With perhaps the exception of the 12 million BuyGoldNoworYouraLoserBecauseTheSkyIsFalling.com's.

Here's the Fed's explanation of why they did away with the M3:

http://www.federalreserve.gov/Releases/h6/discm3.htm
Release Date: November 10, 2005

M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits.

I also prefer good news. Preferably if it was published today.

http://www.reuters.com/article/economicNews/idUSNYS00542020090918"
Fri Sep 18, 2009 10:31am EDT
Reuters

...

Such a concerted move among all of the index's components suggest an "unstoppable" recovery ECRI Managing Director Lakshman Achuthan told Reuters.

Achuthan has recently said that a double-dip recession is highly unlikely, and that an economic turnaround will be stronger than many analysts project.

"We have never wavered on our call precisely because at this stage of the cycle there are no relevant roadblocks," Achuthan said, adding that concerns over mounting unemployment, debt-laden consumers, and dips in a recovery are typical of recessionary times.

"Variations of these fears have existed at this stage of the last 20 business cycle recoveries spanning over a century."

...

 

[WhoWee]

Interesting that the first 20 google hits for "exploding money supply" are all dated around the time of Mr. Laffer's article. March thru June of 2009. It seems no one is talking about it any more. It's almost like the pork barrel for arrow makers incident. Everyone jumps on the "ditto" bandwagon, plagiarizes someone else's article, and it's pat each other on the back time. Then someone figures out that the tripe they were predicting didn't come true. Then no one talks about it anymore. With perhaps the exception of the 12 million BuyGoldNoworYouraLoserBecauseTheSkyIsFalling.com's.

Here's the Fed's explanation of why they did away with the M3:

I also prefer good news. Preferably if it was published today.

Fine, push M3 to the side. Is this relevant?
http://wallstreetblips.dailyradar.com/story/china-alarmed-by-us-money-printing/

" telegraph.co.uk - 12 days ago
China alarmed by US money printing
—
The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy. "

 

[Astronuc]

Here's an interesting perspective on the recovery.

August 24, 2009
The Invisible Achievement
http://www.realclearpolitics.com/articles/2009/08/24/the_invisible_achievement_98000.html
By E.J. Dionne, Washington Post

SYDNEY, Australia -- The hardest slogan to sell in politics is: "Things could have been a whole lot worse." No wonder President Obama is having trouble defending his stimulus plan.

If governments around the world, including our own, had not acted aggressively -- and had not spent piles of money -- a very bad economic situation would have become a cataclysm.

. . . .
In fact, for all the flaws in the execution of the bank bailout program, Bush's willingness last fall to put the urgent need for massive action over his own ideological proclivities is likely to go down as the most enduringly constructive act of his presidency.

. . . .
If anything, Rudd has it easier than Obama. Australia's unemployment rate in July was 5.8 percent, compared with 9.4 percent in the United States. Technically, at least, Australia has so far avoided recession.

And Rudd's conservative predecessor, unlike Obama's, was fiscally responsible. Thus, Australian Treasurer Wayne Swan points out that even after his government's large stimulus spending, the country's budget deficit will peak at 4.9 percent of GDP in 2009-10. In 2009, Swan noted, the U.S. budget deficit will hit 13.6 percent of GDP.

Then there is the biggest difference in the national political situations: Australia already has a national health system. This means that Rudd has been able to concentrate on the economy and cap-and-trade legislation while Obama has found himself battling in the health care trenches.
. . . .

 

[OmCheeto]

Fine, push M3 to the side. Is this relevant?
http://wallstreetblips.dailyradar.com/story/china-alarmed-by-us-money-printing/

" telegraph.co.uk - 12 days ago
China alarmed by US money printing
—
The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy. "

Everything is relevant. Opinions are relevant if they sway people one way or the other. Even lies are relevant if people believe them.

China is rightfully worried that the dollar might collapse. From your article above:

Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

China's reserves are more than – $2 trillion, the world's largest.

If the dollar were to lose half it's value on the international money markets, they'd lose a trillion dollars. If I had that much to lose, I'd be throwing quite the hissy fit.

On the other hand, if the dollar's value rises back to it's http://www.marketwatch.com/investing/index/DXY", they'd make $340 billion.

So I'd analyze their statement as being a financially logical one. They want the value of the dollar to rise so they will make money and they will say whatever they have to to make that happen.

Perhaps we'll be seeing Chinese nationals at future town hall meeting shouting at our reps with pictures of Germans with wheelbarrow's full of money from 1923 with maybe Obama's picture pasted over the peoples faces in the photo's and they can maybe throw in a few "Heil Hitler's" for good sound bites.

But as always, my foray into good news.
A sampling of the first 20 google hits for "economy" in the "news" section:

US Stocks Advance, Sending Dow to 11-Month High
Bloomberg - Sept 19, 2009

Dollar Falls to One-Year Low as Economy Spurs High-Yield Demand
Bloomberg - Sept 19, 2009

Japan's Bonds Fall Most Since July on Signs Economy Recovering
Bloomberg - ‎Sept 18, 2009‎

fedex Says Economy is Stabilizing
Wall Street Journal - ‎Sept 17, 2009‎

 

[OmCheeto]

Here's an interesting perspective on the recovery.

August 24, 2009
The Invisible Achievement
http://www.realclearpolitics.com/articles/2009/08/24/the_invisible_achievement_98000.html
By E.J. Dionne, Washington Post

Odd how we pick out different things to quote from the different articles you post:

If governments around the world, including our own, had not acted aggressively -- and had not spent piles of money -- a very bad economic situation would have become a cataclysm.

But because the cataclysm was avoided, this is an invisible achievement. Many whose bacon was saved, particularly in the banking and corporate sectors, do not want to admit how important the actions of government were. Anti-government ideologues try to pretend that no serious intervention was required.

So everyone goes back to complaining about high deficits and the shortcomings of government as if nothing had happened.

I suppose each of our paths creates a different canvas upon which we keep applying the paints to our realities.

...

Um... I don't know what that means.

I may have inhaled something in the mid 80's.

 

[mheslep]

Here's an interesting perspective on the recovery.

August 24, 2009
The Invisible Achievement
http://www.realclearpolitics.com/articles/2009/08/24/the_invisible_achievement_98000.html
By E.J. Dionne, Washington Post

Odd how we pick out different things to quote from the different articles you post:I suppose each of our paths creates a different canvas upon which we keep applying the paints to our realities.

The bank bailouts seemed to have stopped panics, perhaps creating another problem for later, but Australian PM Rudd speaks directly to fiscal spending here in Astronuc's Real Clear... source. In that sense I say PM Rudd is talking BS, especially when says, via Dionne:

One person who empathizes with our president is Australian Prime Minister Kevin Rudd. He argues that if the governments of the world's biggest economies had not injected "$5 trillion plus into the real economy" in stimulus and had not taken other coordinated actions, we would have relived "the tawdry tale of the 1930s."

First, the primary cause of the Great part of the Great Depression was the federal government itself through the tight money fiscal policies of the Fed. This is not controversial. Whether or not the government helped get the country out of the depression through fiscal stimulus is another matter.

As to whether the current day fiscal stimulus spending worked, in the opinion of at least one economist is no:
http://johnbtaylorsblog.blogspot.com/

Sunday, September 20, 2009
Is the Stimulus Working?
My recent Wall Street Journal column with John Cogan and Volker Wieland looked at the data available so far and concluded that there has been no noticeable impact. CNBC's Steve Liesman takes the other side in a debate with me on the the Kudow Report last Thursday.

Many asked me how we control for other factors, such as oil prices, in such studies; the answer is to use regression techniques as in this AEA paper. A contrast between Keynesian and more modern macro models is found in this robustness analysis by Cogan, Cwik, Taylor, and Wieland

http://2.bp.blogspot.com/_GhUVXaopHNE/SrbCITG0rvI/AAAAAAAAAD0/AJ0R0UBNSsE/s1600-h/graph011.gif
http://2.bp.blogspot.com/_GhUVXaopHNE/SrbCITG0rvI/AAAAAAAAAD0/AJ0R0UBNSsE/s1600-h/graph011.gif

 

[WhoWee]

The Government is in much worse shape than the banks. This is why Obama is focused on "health care reform". The (Democratic spending) party is over unless this Bill passes. The problem is clearly not insurance companies - it's Government spending and deficits.

http://www.ncpa.org/pub/ba662

"Social Security and Medicare Projections: 2009

Brief Analysis | Social Security

No. 662

Thursday, June 11, 2009

by Pamela Villarreal

The 2009 Social Security and Medicare Trustees Reports show the combined unfunded liability of these two programs has reached nearly $107 trillion in today's dollars! That is about seven times the size of the U.S. economy and 10 times the size of the outstanding national debt.

The unfunded liability is the difference between the benefits that have been promised to current and future retirees and what will be collected in dedicated taxes and Medicare premiums. Last year alone, this debt rose by $5 trillion. If no other reform is enacted, this funding gap can only be closed in future years by substantial tax increases, large benefit cuts or both.

Social Security versus Medicare. Politi*cians and the media focus on Social Security's financial health, but Medicare's future liabilities are far more ominous, at more than $89 trillion. Medicare's total unfunded liability is more than five times larger than that of Social Security. In fact, the new Medicare prescription drug benefit enacted in 2006 (Part D) alone adds some $17 trillion to the projected Medicare shortfall - an amount greater than all of Social Security's unfunded obligations."

 

[Office_Shredder]

We have nearly doubled the money supply - inflation will follow.

http://www.shadowstats.com/alternate_data

The article makes reference to Argentina.
http://home.uchicago.edu/~gbecker/Businessweek/BW/2002/02_11_2002.pdf

Actually, I heard an argument that this won't necessarily occur, and it sounded decent:

In the past, governments that have greatly increased the money supply have spent that money. In this case, most of the money went to bailing out banks. Basically, the banks loaned money that they didn't have, and the government is now giving them that money so they can stay solvent. So in this case, the banks basically printed the money already, and the bailout money is just the printing of money that's already for all practical purposes been in the general economy.

Couple that with the fact that nowhere on that website does it indicate we doubled the money supply (the chart supplied indicates at most it increased by about 50%)

 

[OmCheeto]

First, the primary cause of the Great part of the Great Depression was the federal government itself through the tight money fiscal policies of the Fed.

Ummm... This is not your grandmothers depression. This is a financial and global revolution we are going through right now.

All rules are gone. ixnay. vamoose.

Either hang on, or jump off.

Roller coasters are not for wimps.



Wheeeeeeeee! Ah! Hahahahahaha!



ps. I predict 36 months will pass before everyone is sitting back and wondering what all the hoopla was all about.

 

[mheslep]

Ummm... This is not your grandmothers depression. ...

Yes, but Australia's Rudd was comparing to grandma's depression.

 

[Galteeth]

Bottom line, the fundamentals of the current world economic situation do not seem to be sustainable in the long term (the US consuming, China Producing, more and more government hand waving to make the numbers add up). Especially with the 40 to 70 trillion in unfunded liabilities. Inflation can be damaging in ways other then zimbabwe insanity (directing resources to inefficient users, warping people's consumption habits in unsustainable directions.) Time will tell.

 

[WhoWee]

Actually, I heard an argument that this won't necessarily occur, and it sounded decent:

In the past, governments that have greatly increased the money supply have spent that money. In this case, most of the money went to bailing out banks. Basically, the banks loaned money that they didn't have, and the government is now giving them that money so they can stay solvent. So in this case, the banks basically printed the money already, and the bailout money is just the printing of money that's already for all practical purposes been in the general economy.

Couple that with the fact that nowhere on that website does it indicate we doubled the money supply (the chart supplied indicates at most it increased by about 50%)

You can't isolate TARP as the only "spending". Obama has also given us the stimulus and wants cap and trade, health care reform, and possibly immigration amnesty. Further, interest rates are being suppressed. Consider all of these factors along with this from my earlier post.

"The 2009 Social Security and Medicare Trustees Reports show the combined unfunded liability of these two programs has reached nearly $107 trillion in today's dollars! That is about seven times the size of the U.S. economy and 10 times the size of the outstanding national debt.

The unfunded liability is the difference between the benefits that have been promised to current and future retirees and what will be collected in dedicated taxes and Medicare premiums. Last year alone, this debt rose by $5 trillion. If no other reform is enacted, this funding gap can only be closed in future years by substantial tax increases, large benefit cuts or both."

We are clearly in new territory.

 

[Galteeth]

You can't isolate TARP as the only "spending". Obama has also given us the stimulus and wants cap and trade, health care reform, and possibly immigration amnesty. Further, interest rates are being suppressed. Consider all of these factors along with this from my earlier post.

"The 2009 Social Security and Medicare Trustees Reports show the combined unfunded liability of these two programs has reached nearly $107 trillion in today's dollars! That is about seven times the size of the U.S. economy and 10 times the size of the outstanding national debt.

The unfunded liability is the difference between the benefits that have been promised to current and future retirees and what will be collected in dedicated taxes and Medicare premiums. Last year alone, this debt rose by $5 trillion. If no other reform is enacted, this funding gap can only be closed in future years by substantial tax increases, large benefit cuts or both."

We are clearly in new territory.

The catch 22 is that the holders of US debt don't want the currency to collapse, as their holdings will lose value. So they have to keep financing the US to keep it's economy afloat.

Again, can't be certain, but it seems like at some point, something's got to give.

 

[WhoWee]

Auto sales retracted after Cash for Clunkers.
http://finance.yahoo.com/news/Sept-US-auto-sales-fall-amid-apf-696192978.html?x=0

 

[WhoWee]

This article points out that unemployment benefits have been extended, but (to summarize) new jobs (net jobs) are not being created to "catch" the people falling off the extensions.
http://news.yahoo.com/s/usnews/20091002/ts_usnews/whytheseptemberjobsreportissobrutal

"There are not enough jobs: A bill that would provide another 13 weeks of federally funded unemployment benefits to hard-hit states sailed through the House last week but may be complicated by some senators' efforts to get benefit extensions for all states. In some states, eligible workers have already received as many as 79 weeks of benefits. Historically, spells of unemployment that lasted a year or more were very rare, says Harvard economist Lawrence Katz, a Harvard economist. These trends are the sorts that haven't been seen since the Great Depression.

Indeed, the number of workers who have been unemployed for 27 weeks or more--called "long-term unemployed"--rose by 450,000, to 5.4 million. Last month, 36 percent of the unemployed had been out of work for at least six months. The unemployed face a market in which job seekers outnumber job openings by a ratio of 6 to 1."

 

[Oraltalker]

http://libertysilver.se/pages.php/page/editorial_090107/language/en

Three parts about What has caused the financial turmoil?

Part 2 will discuss and examine the current and future outlook for inflation or deflation.

Part 3 will investigate how the precious metals market is affected by the financial situation.

 

[mheslep]

http://libertysilver.se/pages.php/page/editorial_090107/language/en

Three parts about What has caused the financial turmoil?

Part 2 will discuss and examine the current and future outlook for inflation or deflation.

Part 3 will investigate how the precious metals market is affected by the financial situation.

By citing this are you arguing for a return to the depression era gold standard?

 

[Astronuc]

The CIT bankruptcy lose-lose
Commentary: Taxpayers, small businesses, creditors lose; Goldman wins
http://www.marketwatch.com/story/the-lose-lose-cit-bankruptcy-2009-10-05

NEW YORK (MarketWatch) -- CIT Group Inc's nearing liquidation under bankruptcy protection should go down as one of the Obama administration's great defeats in battling the financial crisis.

CIT may seek bankruptcy protection should its $29 billion exchange offer fall short. See full story.

It won't, however, mostly because champions of the "free market" will say how another bailout was avoided and they'll herald how competitors took up the slack of CIT's place in the market. They'll also say how the original loan agreement with bondholders kept CIT's demise from becoming a market panic.

The reality is a little less neat. Taxpayers will be owed, and likely will be made whole, a debt of $2.3 billion from the Troubled Asset Relief Program. Business owners will begin a guessing game as they wonder who will take over their CIT account and whether that account will be renewed. And Goldman Sachs Group Inc. will press for a $1 billion payment due to it under a 2008 rescue agreement, according to The Financial Times.

Again, Goldman has made brilliant use of credit default swaps, the derivatives that appear to have been so toxic to everyone else, including many who didn't hold them: U.S. taxpayers.

. . . .

It's not clear that TARP will recover all investments.

U.S. 'Unlikely' to Recoup Auto Outlay, Panel Finds
http://www.washingtonpost.com/wp-dyn/content/article/2009/09/08/AR2009090804072.html
Treasury Urged to Be More Transparent

The federal government is unlikely to recoup all of the billions of dollars that it has invested in General Motors and Chrysler, according to a new congressional oversight report assessing the automakers' rescue.

The report said that a $5.4 billion portion of the $10.5 billion owed by Chrysler is "highly unlikely" to be repaid, while full recovery of the $50 billion sunk into GM would require the company's stock to reach unprecedented heights.

"Although taxpayers may recover some portion of their investment in Chrysler and GM, it is unlikely they will recover the entire amount," according to the report, which is scheduled to be released Wednesday.

Wait and see.

 

[WhoWee]

http://libertysilver.se/pages.php/page/editorial_090107/language/en

Three parts about What has caused the financial turmoil?

Part 2 will discuss and examine the current and future outlook for inflation or deflation.

Part 3 will investigate how the precious metals market is affected by the financial situation.

Hello Oraltalker, I see this is your first post, welcome to PF. Maybe you'd like to share a little info about your professional experience?

In response to your comments, I think the most important element of your post is the Savings Rate time line.

Take a look at the trend in savings after "Black Monday", Oct. 19, 1987. On that day, the Dow lost about 22%.
http://www.usnews.com/money/business-economy/articles/2007/10/19/the-lessons-of-black-monday.html Also keep in perspective the S&L crisis of the same time period.
http://www.fdic.gov/bank/Historical/s&l/

The Government's response over the next few years was to cut interest rates, a trend that has continued until now. While it fueled growth, it also inadvertently chased cash out of the banks and into the stock market - which also fueled the market recovery.
http://mortgage-x.com/trends.htm

The problem now is that savings rates are low, interest rates are low, the market is low, and housing starts are low - plus unemployment is high, credit card debt is high, and inflation is expected to increase. Next, couple those variables with massive Government stimulus, bank bailouts, auto/union bailouts, increasing health care costs (social security, medicare, and medicaid), and unpredictable energy costs.

The result is that we are in somewhat unfamiliar waters at this time.

 

[Astronuc]

Some things to think about.

How bad is the U.S. budget deficit?
http://marketplace.publicradio.org/display/web/2009/10/05/am-sloan-q/

Sloan: The first set is the number almost everybody uses -- $1.6 trillion, which will be the official deficit number. And then there's the number I use and a few other agent cranks who care about things. And our number is roughly $2 trillion.

. . . .
Sloan: Well, I think it's really bad. What you're going to start hearing is two sets of things. One of which is going to be: well, as a percentage of the economy, this number is only about half the deficit we had during World War II, so they really don't matter. That's going to be one set. And the other set is going to say: The end of the world is at hand.

Chiotakis: We know what kind of problems go with deficits and high debt. What kind of issues are we likely to confront first with all this though?

Sloan: Well if this doesn't stop -- and I don't think it will -- we're going to discover that the rest of the world is going to want higher interest rates to lend money to the United States than it now is demanding. And a lot of this money that we're paying in interest basically leaves the country as opposed to, say, World War II -- where the deficits as a percent of the economy were much bigger, but we financed them pretty much inside the country so the interest payments that the government was making stayed inside the country and the money was recycled. And now it's going to leave. And that is not a good thing.

Could we have handled the truth?
http://marketplace.publicradio.org/display/web/2009/10/05/pm-tarp/

Bob Moon: Where do you draw the line between "break it to me gently," or being intentionally misleading? That's the question raised in an audit released this morning by the government overseer of the federal bailout program. He previously said we're not likely to see all our TARP money again. And now Neil Barofsky says top officials weren't leveling with the public about the health of some of the nation's biggest banks when they pitched their bailout plan last year. Here's Marketplace's Steve Henn in Washington.

. . . .

We hear comparisons of the current economic situation with the Great Depression era, and that's sometimes followed with "we're on our way to recovery". But what's different about then and now?

Well - then the US was a net creditor with a + balance sheet. Europe's and Asia's economies were battered by WWII and the significant economies of many smaller countries were under the control the European colonial power, e.g., England, France, Germany, . . . .

But now the US is a debtor nation - with substantial debt - and little prospects for significant growth (GDP increasing > 3%/a). In addition, the US now has to compete against EU, BRIC and other economies for the same limited resources - and BRIC can provide many of the same products that the US used to provide to the global economy.

 

[Astronuc]

Amid the global economic crisis, China rises
http://news.yahoo.com/s/ap/20091007/ap_on_bi_ge/as_meltdown_rising_china

BEIJING – The auto-parts maker Delphi Corp. is headquartered in Troy, Mich., in the heart of the region that made the United States the car capital of the world. It's a place where the phrase "buy American" is right at home.

Now the 3,000 employees of Delphi's brake and suspension unit are getting a new boss. Battered by weak sales, Delphi is selling the unit to investors led by a company named Shougang Corp.

Shougang is a steel maker owned by the government of China — a government that calls itself communist but espouses a "socialist market economy" as it marches down globalization's road toward a capitalistic future.

"Everyone's so desperate for cash that the Chinese show up with a checkbook and people say, `Yes, please'," says Arthur Kroeber, managing director of Dragonomics, a Beijing research firm.

Explosive growth in China and India, coupled with Japan's clout as the world's No. 2 economy, has long been expected to shift economic power from the United States to Asia as this century progresses. The financial crisis and resulting Great Recession are accelerating that process.
. . . .

We shall see.

 

[WhoWee]

How much is "GM" selling the division to the Chinese for - is it more than the Government guaranteed in (some) pensions and health care benefits?http://online.wsj.com/article/SB10001424052970203517304574306482334001914.html

http://www.tribtoday.com/page/content.detail/id/518132.html?nav=5003

http://tribtoday.com/page/content.detail/id/527488.html?nav=5021

http://www.business-journal.com/default.asp?sourceid=&smenu=1&twindow=&mad=&sdetail=14615&wpage=1&skeyword=&sidate=&ccat=&ccatm=&restate=&restatus=&reoption=&retype=&repmin=&repmax=&rebed=&rebath=&subname=&pform=&sc=1711&hn=business-journal&he=.com

 

[mheslep]

Amid the global economic crisis, China rises
http://news.yahoo.com/s/ap/20091007/ap_on_bi_ge/as_meltdown_rising_china

We shall see.

The Japanese attempted similar acquisitions here in the 80's. A small golf course close to where I grew up was bought by Japanese investors flush with cash. Turns out they sold it some years later for 1/3 of the purchase price.

 

[WhoWee]

The Japanese attempted similar acquisitions here in the 80's. A small golf course close to where I grew up was bought by Japanese investors flush with cash. Turns out they sold it some years later for 1/3 of the purchase price.

The Japanese also used inflated Tokyo land values to finance US properties - that didn't have sufficient cash flow to cover debt service.

 

[Astronuc]

In Merrill’s Failed Plan, Lessons for Pay Czar
http://dealbook.blogs.nytimes.com/2009/10/07/in-merrills-failed-plan-lessons-for-pay-czar/

It sounds like something Washington’s pay czar might propose to rein in runaway bonuses on Wall Street, The New York Times’s Louise Story writes. Tie executives’ compensation to their company’s stock price. Withhold big paydays for years. Claw back bonuses if things go wrong. And force risk-loving traders to gamble with their own money, not just their company’s.

In fact, those strictures were part of a compensation plan that Merrill Lynch adopted voluntarily in 2006 — two years before the company collapsed into the arms of Bank of America.

But the Merrill program, which was supposed to align its top employees’ pay with the company’s long-term performance, did not keep workers from taking risks that nearly sank the brokerage giant. And some of its senior executives still stand to collect millions of dollars in stock under the plan.

As the Obama administration’s pay czar, Kenneth R. Feinberg, contemplates curbing compensation for the top 100 executives at each of the seven companies that received big bailouts — including Bank of America — the Merrill experience raises some sobering questions.

. . . .

Financial Time's points out that the drive to reform has slowed, and some regulators are reluctant to take on the financial industry.

 

[Astronuc]

The recovery is working for some, but not others.

Still on the Job, but at Half the Pay
http://www.nytimes.com/2009/10/14/business/economy/14income.html

Bonuses Put Goldman in Public Relations Bind
http://finance.yahoo.com/career-work/article/107974/bonuses-put-goldman-in-public-relations-bind

. . . .
For Goldman employees, it is almost as if the financial crisis never happened. Only months after paying back billions of taxpayer dollars, Goldman Sachs is on pace to pay annual bonuses that will rival the record payouts that it made in 2007, at the height of the bubble. In the last nine months, the bank set aside about $16.7 billion for compensation — on track to pay each of its 31,700 employees close to $700,000 this year. Top producers are expecting multimillion-dollar paydays.
. . . .

I have a friend who worked at Goldman and survived all but one of the last rounds of layoffs. Even when they were poised to make profits - they let folks go.


Meanwhile - Warren: Housing Market Getting Worse
http://finance.yahoo.com/techticker/article/355866/Warren:-Housing-Market-Getting-Worse

There's been a lot of talk lately about a recovery in the housing market – even reports of bubbles re-inflating in certain markets.

Elizabeth Warren, chair of the Congressional Oversight Panel, isn't buying it.

"We see things getting worse in the housing market," Warren says, citing the pernicious effects of foreclosures, which rose 5% in the third quarter to a total of 937,840, according to RealtyTrac.

"The long-term impact of high foreclosure rates on our housing market and overall economy would be disastrous," Warren warns, citing estimates that 10 to 12 million U.S. homes could ultimately go into foreclosure. "We have to get foreclosures under control."

Why the sense of urgency? A single foreclosure property brings prices down an average of $5000 for every house in a two-block radius and costs investors an average of $120,000, she says.

In its most recent report, Warren's panel criticized the Treasury's foreclosure modification efforts as "inadequate" and "targeted at the housing crisis as it existed six months ago, rather than as it exits right now."

. . . .

 

[Astronuc]

I wonder if sometimes certain talk (talking up or down the equities markets) becomes a self-fulfilling prophesy.

A Dow Bubble? It Looks Like It
http://www.nytimes.com/2009/10/15/business/15bviews.html

. . . .
The Dow broke through 4,000 on Feb. 22, 1995. That was the day Alan R. Greenspan, then chairman of the Federal Reserve, first hinted at a relaxation of monetary policy. At that time, the American economy was in its fourth year of expansion, and stock prices were 50 percent above their peak before the 1987 crash. Modest optimism prevailed.

So it’s logical to peg 4,000 as an estimate for the Dow’s reasonable level at the time. Inflate that by the increase in nominal gross domestic product in the intervening period, which should be related to company profits and valuations, and assume a 4 percent annual growth rate for nominal G.D.P. in the third quarter this year, and the equivalent reasonable valuation today would be just north of 7,800.
. . . .

Has the economy actually grown in real wealth, or is most of it credit/debt, and if the latter - how much of it cannot be repaid?

At what point does the US economy run out of room to continue adding debt?

The 2009 deficit is estimated at ~ $1.4 trillion, and next year's could be just as bad. States are trying to cut budgets in order to avoid deficits, and apparently counties and municipal governments are experiencing reduced revenue and having to cut back as well. Meanwhile, states, counties, and municipal govts want some of that Federal stimulus money. It would be one thing to borrow the money for investing in something that will provide a return on investment, but it seems to me the stimulus money is mostly going to O&M (operating and maintenance) expenses. And taxpayers want to pay less taxes.

If everyone pays less taxes, who does the debt get repaid - on top of providing services and O&M?

 

[mheslep]

At what point does the US economy run out of room to continue adding debt?

I'd distinguish between the private economy, http://www.bea.gov/BRIEFRM/SAVING.HTM" , not adding, and the federal government which is piling on debt at record rates.

 

[Galteeth]

I'd distinguish between the private economy, http://www.bea.gov/BRIEFRM/SAVING.HTM" , not adding, and the federal government which is piling on debt at record rates.

In the long run these things may not be as separate as they seem.

 

[WhoWee]

I wonder if sometimes certain talk (talking up or down the equities markets) becomes a self-fulfilling prophesy.

A Dow Bubble? It Looks Like It
http://www.nytimes.com/2009/10/15/business/15bviews.html

Which Dow average are we talking about?
http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average

A quick look shows that 5 of the 30 companies have been swapped out in 2008 and 2009 - the $10,000 number is meaningless - apples/oranges.

 

[Astronuc]

Which Dow average are we talking about?
http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average

A quick look shows that 5 of the 30 companies have been swapped out in 2008 and 2009 - the $10,000 number is meaningless - apples/oranges.

I'm sure they Dow Jones Industrial Average or Dow 30. When a new component is added, it's weighted to match the one replaced. Over course, the media talk about the Dow without considering that over the years, failing companies are removed and replaced with better performing companies in order to better reflect the health of the economy.

I think the part "Inflate that by the increase in nominal gross domestic product in the intervening period, which should be related to company profits and valuations, and assume a 4 percent annual growth rate for nominal G.D.P. in the third quarter this year," is an attempt to put it on less of an apples/oranges basis. I have no idea how rigorous it is, or how objective it is. It's just one person's way of saying the Dow is overvalued - still.

 

[Astronuc]

I'd distinguish between the private economy, http://www.bea.gov/BRIEFRM/SAVING.HTM" , not adding, and the federal government which is piling on debt at record rates.

But it appears that essentially the private saving is funded by the government debt. In other words, the government is not responsibly taxing at the appropriate rate to cover it's expenses.

On the other the hand I remember hearing that the personal savings rate was actually negative at some time during the last 4 or 5 years.

Why Americans Are Going Broke
http://www.newsweek.com/id/106778

Times are bleak for the U.S. consumer. The average household owes 20 percent more than it makes each year. The personal savings rate is in negative territory. Record numbers of Americans are losing their homes to foreclosure, and millions more are struggling to keep up with their monthly bills and obligations. And the nation's economy isn't in much better shape. The Treasury Department has estimated that, with the added costs of the economic stimulus plan passed by the House of Representatives this week in an effort to avoid a recession, the federal deficit could rise to as much as $400 billion this year.

Then there's this - "The national savings rate -- which includes corporate savings and government budget deficits --"

Certainly the numbers seem to show a savings crisis. Over the past year, the household savings rate has averaged a meager 0.8% of disposable income, the lowest level since the Great Depression. The national savings rate -- which includes corporate savings and government budget deficits -- is only about 13.6% of gross domestic product, also near a postwar low.

(JANUARY 17, 2005) http://www.businessweek.com/magazine/content/05_03/b3916043_mz011.htm
There is a big discrepancy between household and national savings rates.

In reading the rest of the article, one notes the positive tone -

Rising Asset Prices
So while other countries chide the U.S. for being profligate, Americans are putting more money into the things that matter over the long run. That's reflected in U.S. economic performance, among the strongest in the world. Both in the short run -- the past year -- and the long run -- the past 20 years -- the U.S. has had the fastest growth of the major industrialized countries.

Moreover, low personal savings has not stopped Americans from accumulating plenty of assets for retirement. Strong economic growth has lifted both housing and equity values. Over the past decade, for example, the NASDAQ is up 182% and Standard & Poor's 500-stock index is up 158%, far more than the London, Frankfurt, Paris, or Tokyo bourses. Over the same stretch, household net worth is up 67%, after adjusting for inflation and subtracting federal debt.

But 4 years later a lot of that 'wealth' had vanished! And we've seen home real estate values drop on the order of 30%, or more in some places.

 

[OmCheeto]

But 4 years later a lot of that 'wealth' had vanished! And we've seen home real estate values drop on the order of 30%, or more in some places.

Only 30%? The http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html" is fun to look at. It looks as though everyone who owned a home in 1997 nearly doubled their money by 2006.

If you plot a line from 1997 to 2009 on http://mysite.verizon.net/vzeqrguz/housingbubble/", housing prices are still up nearly 20%.

And going up for the last two quarters as I recall.

Oh, but wait, rising housing prices are bad:

http://au.biz.yahoo.com/090929/2/28vua.html
Rising house prices hurt vulnerable: RBA
Tuesday September 29, 2009, 5:46 pm

Rising house prices can hurt low income Australians and governments should keep working to stop prices rising too fast, the Reserve Bank of Australia (RBA) says.

Prices go down, it's bad. Prices go up, it's bad. It's always bad.

Stupid humans.

 

[mheslep]

But it appears that essentially the private saving is funded by the government debt. In other words, the government is not responsibly taxing at the appropriate rate to cover it's expenses.

?? Yes the government is deficit spending. That doesn't mean they are 'funding' private savings. I don't follow the 'responsibly taxing' part - the whole theory of Keynesian stimulus is to borrow money from the future to stimulate anemic aggregate demand now. Not that I agree the stimulus works, but raising taxes in a recession doesn't even comport with the theory.

On the other the hand I remember hearing that the personal savings rate was actually negative at some time during the last 4 or 5 years.

Why Americans Are Going Broke
http://www.newsweek.com/id/106778


Then there's this - "The national savings rate -- which includes corporate savings and government budget deficits --"

(JANUARY 17, 2005) http://www.businessweek.com/magazine/content/05_03/b3916043_mz011.htm
There is a big discrepancy between household and national savings rates.

The first article is dated last year Feb 2008. Yes certainly the savings rate was negative back then, but not now.

 

[WhoWee]

I've posted on this subject several times across various threads. Since the 1987 market "adjustment", interest rates have been lowered.

This enabled growth, but it also chased savings into the market.

 

[Astronuc]

Intersting perspective from Allan Sloan.

Uncle Sam's gift to the prudent saver: Less money
http://www.washingtonpost.com/wp-dyn/content/article/2009/10/19/AR2009101903569.html

This is a quiz. What do the record-high Wall Street bonuses have in common with the record-low yields for savers? Answer: They show yet another way that prudent people, especially those living on fixed incomes, are being cheated by the government's bailout of the imprudent.

Here's the deal. The government is spending trillions to keep interest rates down to support the economy and prop up housing prices, and those low rates have inflicted collateral damage on savers' incomes. "It's a direct wealth transfer from savers and retirees to overly indebted borrowers," says Greg McBride, senior financial analyst at Bankrate.com.

. . . .

So the prudent investor (low risk) get low and lower interest rates, and the guys who took high risk and lost - get subsidized by the Federal government. What's wrong with this picture?

 

[Astronuc]

Some fallout of a Federal inquiry. This probably belongs under "What's wrong with the US economy".

Six people, including the founder of the big hedge fund the Galleon Group, were arrested on Friday in one of the largest hedge fund insider trading schemes in history. The scheme, according to prosecutors, reached across a broad swath of corporate America and ensnared among others a top I.B.M. official and executives at Intel and McKinsey & Company.

At the center of the scheme is Raj Rajaratnam, who built Galleon into a multibillion-dollar hedge fund and a respected investor in technology companies. But Mr. Rajaratnam's charitable giving to his native Sri Lanka has attracted the attention of law enforcement authorities investigating fundraising for the Tamil Tigers rebel group.

http://www.nytimes.com/2009/10/17/business/17insider.html

 

[Galteeth]

?? Yes the government is deficit spending. That doesn't mean they are 'funding' private savings. I don't follow the 'responsibly taxing' part - the whole theory of Keynesian stimulus is to borrow money from the future to stimulate anemic aggregate demand now. Not that I agree the stimulus works, but raising taxes in a recession doesn't even comport with the theory.

The first article is dated last year Feb 2008. Yes certainly the savings rate was negative back then, but not now.

The theory also suggests reducing spending when the economy recovers.