John Mauldin describes the financial predicament unfolding in the US. He also provides some solutions — tough choices that will get tougher if the denial and ignorance continue. Excerpts below.
Link: Killing the Goose – John Mauldin
Peggy Noonan, maybe the most gifted essayist of our time, wrote a few weeks ago about the vague concern that many of us have that the monster looming up ahead of us has the potential (my interpretation) for not just plucking a few feathers from the goose that lays the golden egg (the US free-market economy), or stealing a few more of the valuable eggs, but of actually killing the goose. Today we look at the possibility that the fiscal path of the enormous US government deficits we are on could indeed kill the goose, or harm it so badly it will make the lost decades that Japan has suffered seem like a stroll in the park.
And while I do not think we will get to that point (though I can’t deny the possibility), for reasons I will go into, there is the very real prospect that the upheavals created by not dealing proactively with the problems (or denying they exist) will be as bad as or worse than the credit crisis we have gone through. This is not going to be something that happens overnight, and the seeming return to normalcy that so many predict has the rather alarming aspect of creating a sense of complacency that will only serve to “kick the can” down the road.
As a culture, the current mix of generations, especially in the US, has made some choices. Choices which, in hindsight, leave the adult in us asking, “What were we thinking?”
We made a series of bad choices and suffered the credit crisis because of it. Now, as a nation, we are in the middle of making an even worse choice, one that will leave us with no good choices – only choices of pretty bad to awful.
OMB projections imply that the US will run deficits equal to 43.3% and 39.9% of expenditures in 2009 and 2010, respectively. To put it simply, roughly 40% of what our government is spending has to be borrowed. [click to continue…]
In this blog post by John Michael Greer, he describes how cheap abundant energy created a mismatch between money and wealth. The bad news is that era of cheap abundant energy is ending and the value of money is being revised. Excerpts below.
Link: The Archdruid Report: The Metastasis of Money.
If economists took a wider view of the history of their discipline than they generally do, they might have noticed that what most of them consider a fundamental feature of all economies worth studying – the centrality of money – is actually a unique feature of an economic era defined by cheap abundant energy. Since the fossil fuels that made that era possible are being extracted at a pace many times the rate at which new supplies are being discovered, current assumptions about the role of money in society may be in for a series of unexpected revisions.
In an ironic way, this process of revision may be fostered by the antics of the world’s industrial nations as they try to forestall the Great Recession by spending money they don’t have. The economic crisis that gripped the world in 2008 was primarily driven by a drastic mismatch between money and wealth. When the price of a rundown suburban house zoomed from $75,000 to $575,000, for example, the change marked a distortion in the yardstick rather than any actual increase in the wealth being measured. That distortion caused every economic decision based on it – for example, a buyer’s willingness to go over his head into debt to buy the house, or a bank’s willingness to lend money on the basis of imaginary equity – to suffer similar distortions. Now that the yardsticks have snapped back to something like their proper length, the results of the distortion have to be cleared out of the economy if the amount of money in the system is once again to reflect the actual amount of wealth.
Yet this is exactly what governments and businesses are doing their level best to forestall. Governments are scrambling to prop up economic activity at a pace the real wealth of their societies can no longer support; banks and businesses are doing everything in their power to divert attention from the fact that a great many of the financial assets propping up their balance sheets were never worth anything in the first place and now, if possible, are worth even less. Both are doing so by the simple expedient of spending money they don’t have. As government deficits worldwide spin out of control and the total notional value of the world’s derivatives market climbs steadily above one quadrillion dollars, the decoupling of money from wealth is even more extreme than it was at the height of the real estate bubble.
John Mauldin told us the financial crisis was coming and why. Now he’s issuing a stern warning about the next phase of the financial crisis. Excerpts below.
I’m preparing for the worst and hoping for the best.
Link: Thoughts from the Frontline by John Mauldin
The Obama administration tells us that the government deficit is going to be well over $1 trillion a year for at least ten years. And that does not take into account the outlier years in the 2020s when the really heavy lifting of Social Security and Medicare kicks in.
There is a truism that goes a little like, “If something can’t happen, then it won’t.” Let me make a prediction. We won’t have a trillion-dollar deficit in ten years. Why? Because it can’t happen. The market will simply not allow it.
As I have written, we can run large deficits almost forever, as long as the deficits are less than nominal GDP. While it may not be the wise thing to do, it does not bring down the system.
But when you start adding to the deficit in amounts significantly larger than nominal GDP, there is a limit. Each dollar, like the grains of sand, adds to the potential instability of the system. Is it $2 trillion more? $3 trillion? No one can know, but the longer it goes, the worse the ensuing financial earthquake will be.
The current political class and their intentions are dangerously close to killing the golden goose. It is one thing to steal the eggs; it is an altogether different thing to kill the goose through ignorance of the consequences. And the size of the deficit, for as long as they plan to have it, will most assuredly kill the goose. [click to continue…]
Stewart Dougherty delivers some disturbing observations about the impact of the financial crisis. This is unpleasant fare but important for understanding where we are.
Link: The Metastasis of Moral Hazard and its Effect on Gold - by Stewart Dougherty
There is accumulating evidence that the Washington – Wall Street moral hazard experiment has gone disastrously wrong, and that just like any other accidental discharge of a deadly virus, the moral hazard virus is now loose and swiftly propagating throughout society. By so blatantly colluding with Wall Street, Washington has lost all moral authority, and the people now have only one place to turn: themselves. An ethic of, “If they can do it, so can I,” is spreading, as people realize that fabric of American society has been shredded and replaced by a free-for-all mentality whereby everyone must fend for oneself in order to survive.
If this is so, it is a serious game changer for America.
Evidence of the spread of moral hazard is noticeable everywhere. Despite government reports that the economy contracted only 1% last quarter and is now stabilizing, 13% of all home mortgages were either delinquent or in foreclosure in the second quarter, 2009, an all-time record. Credit card write-offs hover near 10%, also a record. Automobile, home equity and personal loan defaults are at or near record levels. Fiscal year 2009 federal personal tax receipts have declined 22% and corporate receipts have plunged by 57%, even though the economy has supposedly declined by only a fraction of that amount. Compared with January through April, 2008, state personal income tax receipts have plummeted by 26% in 2009, with eight states seeing declines ranging from 30% to 54.9%. Prime and Alt-A mortgage delinquencies and foreclosures are climbing rapidly, and are the true canaries in the banking industry mineshaft. Homeowners evicted by foreclosure trash their homes in rage on the way out the door, with an estimated 50% of such dwellings damaged. Looters and squatters destroy many of the rest, stealing copper pipes, wiring, granite counter tops and anything else of value. Dozens of Internet sites such as “youwalkaway.com” provide calculators to help homeowners decide whether or not to “strategically” default on their mortgages.
The people, whose predictive instincts have been uncannily accurate throughout this crisis, sense that trouble is coming: 80% of them say they expect crime to increase due to the deteriorating economy.
As average American citizens lose their jobs by the millions, become mired in financial distress and are crushed by the largest debt increase in the history of civilization to pay for government bailouts and fiscal stimulus programs, several Wall Street firms, in actions so arrogant they beggar and defy belief, have announced that they will pay record bonuses in 2009. These bonuses commonly amount to 20 – 200+ times the median American wage, in other words, 20 – 200+ times the earnings of the citizens whose taxes were spent only a few months ago to keep the Wall Street firms from imploding.
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Danny Teigman at The Star-Ledger interviews economist Barry Ritholtz about what led to the recession and how to bounce back (9/3/2009).
Link: Interview with Barry Ritholtz
The late 2000s may go down as the age of the bailout. What began with Bear Stearns in March 2008 grew to include a cadre of famous-turned-infamous American financial institutions.
As immediate panic settled, outright bailouts morphed into a multi-billion dollar stimulus package whose impacts are still trickling through the economy.
Barry Ritholtz, author of “Bailout Nation” and director of equity research at Fusion IQ, a New York financial research firm, has a case of the bailout blues. He warns the fundamentals of the country’s banking system remain far from sound.
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Wise investor Warren Buffett has issued a warning in the New Y0rk Times about the creation of paper money (debt) to stimulate the economy. Excerpts below.
Op-Ed Contributor – The Greenback Effect – NYTimes.com.
…Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.
They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.
The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself. [click to continue…]
Paul Ferrell delivers some tough predictions about the boom/bust cycle at MarketWatch. He foresees brutal ‘collateral damage’ that will follow the recovery.
He advises that we make the most of this new bull and then get out — before you’re the collateral damage. Ultimately, he sees a revolution by taxpayers against the Wall Street influence in Washington D.C.
Link: New bull, new bubble, new meltdown by 2012
New, bigger bubble — and a meltdown ahead
Yes, folks, a new bubble cycle is already in motion. You can feel the energy building, the kind that fueled the meltdowns of 1998, 2000 and 2007. We never resolved the problems fueling the dot-com insanity. We made matters worse feeding the subprime credit-derivatives disaster with cheap money, Reaganomics ideology and two costly wars. Lessons were never learned, nothing was resolved. Today matters continue deteriorating.
Behind the hoopla, the Wall Street conspiracy has dumped $23.7 trillion new bailout debt on taxpayers. The bill will come due. But for now, we’re getting their wish: A new bubble is accelerating, thanks to America’s “too-greedy-to-fail” Wall Street banks.
Folks, you can bet on it, sure as Regis is hosting “Who Wants to be a Millionaire?” The bull, a bubble, and another meltdown are virtually certain and accelerating faster than earlier cycles, coming by 2012. How to profit? Ride it up for a couple years, then pray you’ll have enough brain left to bail out in time before the crash (most don’t) because at that point the euphoria is blinding, like a cocaine addiction. [click to continue…]
Tony and Rob Boeckh provide their insights into an unstable future in The Great Reflation Experiment: Implications for Investors. Excerpts below.
Link: The Boeckh Investment Letter
Prior to government bailouts and stimulus, the panic, crash, and precipitous economic decline of 2008/9 were clearly on track to be much worse than the post-1929 experience. The pervasiveness of leverage – from banks to consumers to supposedly blue-chip companies – and the illusion of stability in the system, were fostered through the 25 years that this credit bubble has grown, basically uninterrupted. The speed and magnitude of the bailouts and stimulus – the end of which we won’t see for a long time – aborted the meltdown. However, the story is far from over.
The Great Reflation experiment ultimately has two components. The first is a rise in federal government deficits, debt, and contingent liabilities. The second is an expansion of the Federal Reserve’s balance sheet. Both are unprecedented since World War II. U.S. federal government debt is likely to reach close to 100% of GDP over the next 8 to10 years according to the Congressional Budget Office (CBO) and supported by our own calculations (Chart 3). Anemic growth, falling tax revenue, increased government spending, and bailouts of indigent states, households, businesses, and an aging population will all undermine public finances to a degree never before seen in peacetime. According to CBO data, government debt could reach 300% of GDP by 2050 as contingent liabilities are converted into actual government expenditures. This massive peacetime deterioration in public finances will have grave consequences for living standards and asset markets, particularly in the longer run. [click to continue…]
In the Thoughts from the Frontline Weekly Newsletter, John Mauldin describes the unfolding financial problems in Europe. Unfortunately, it won’t stay in Europe. Excerpts below.
Link: Europe on the Brink
We have avoided Armageddon, at least for now. The cost to the US taxpayer has been a few trillion. Some in the media are loudly announcing the end of the recession. But we are not out of the woods yet. There are a few more bumps in the road. Actually, some of them are quite steep hills. As big as the subprime problem? Maybe.
When asked a few weeks ago what was my biggest short-term concern, I quickly replied, “European banks have the potential to create significant risk for the entire worldwide system.” This week we will glance “over the pond” to see what gives me cause for concern. Then we briefly look at a few of the bumps I mentioned, which are likely to stretch out any recovery, and maybe even dip us back into recession.
Europe on the Brink
Globalization is a two-edged sword. On balance, it has brought prosperity to those who have embraced it, with rising lifestyles, better health, longer lives, and more. The more we need each other, the less likely it is that we’ll shoot each other. Shooting your customers is not a good business strategy. And while the growth has not been even or smooth, only a Luddite would want to return to the early 1800s or 1900s, or even 1975. [click to continue…]
Jim Jubak as MSN Money looks at the financial crisis from the perspective of an investor. He’s not optimistic about getting easy gains from investing in the tough times coming up.
In the excerpts below he describes why we won’t see a recovery for several years.
Link: 5 rules for post-recovery investing – MSN Money – Jubak’s Journal
The Congressional Budget Office predicts the U.S. economy won’t return to full-trend growth until 2015. And full-trend growth — sustainable economic growth without rising inflation — even then isn’t going to be what it was before the global financial crisis.
…a lot of evidence argues in favor of a very slow and tepid recovery:
- In the boom, the economy got the benefit of the wealth effect as families spent part of the gains in the value of their houses and investment portfolios. Now the economy is facing a negative wealth effect as lower home values and smaller investment portfolios cut into household spending. Household net wealth was down 20% from mid-2007 to the end of 2008.
- Like U.S. businesses, American families are going to have to deleverage their balance sheets by paying down debt. That means having less to spend on consumption. Household debt had climbed to 130% of income by the end of 2008.
- Losses in the financial sector of an estimated $2 trillion (only $1 trillion realized to date) will cut the amount of capital available for lending and raise the price of that capital.
- Any recovery will send the price of oil and other raw materials higher, which will act as a drag on the economy. Taxes will climb as governments around the world try to repay some of the debt they had piled on to end the crisis. In the United States, interest rates will climb as overseas investors demand a better return on all the U.S. debt they hold.
- Finally, many companies used cheap money to offer incentives to keep their customers buying. Even in a recovery, sales won’t bounce back to boom-year levels.