The Recession might have a few darts left...

[tacitus]

picked up this bit of insight from SLATE today:

“Not every member of the Federal Reserve’s Open Market committee thinks the central bank’s job in handling the financial crisis is done, reports the New York Times. The Fed is taking steps to end some of the programs it had started to prop up the housing market through the collapse, but according to minutes from the committee’s mid-December session, the decision wasn’t universally viewed as the final action: “If [economists] are wrong, and the modest pace of economic growth slows or mortgage markets significantly deteriorate, ‘a few members’ of the Federal Open Market Committee believe that ‘more policy stimulus’ may be desirable, the Fed minutes said.” James Bullard, the president of the St. Louis Federal Reserve Bank, has publicly said the Fed should keep its program of buying mortgage-backed assets—to the tune of $1.25 trillion—alive. But Bullard isn’t currently a member of the committee, which decides such matters, though he will become one later this year. It’s already been estimated that ending the program will push mortgage rates back up by half a point to a point, squeezing some potential buyers out of the housing market. The Fed is walking a “tightrope,” as one economist puts it, between weaning the private sector off of the Fed’s beneficence and sending the housing market off another cliff.”

[PheroQuirk]

or perhaps, spurred on by ignorant and always-wrong journalists, the Fed is going to make doubleplus sure that it acts too late, inflating a bubble in agricultural commodities and emerging markets and pushing up long term financing costs before realizing that it has once again been a bit too easy for too long.

which isn’t to say that the period of unpleasantness is over. not by a long shot.

[Mtnjim]

Shades of 1933! **

** In 1930 FDR was elected and to help end the depression embarked on a massive government spending plan, that started to bring the economy out of depression. In 1933, Republicans “convinced” FDR to end his “wasteful and foolish” spending plan and the economy immediately fell back into depression which lasted until the War economy introduced more government spending that ended the Depression.

[Wrlprchnx]

Don’t worry… the economy dips back into recession late in 2011 when Bush’s tax cuts expire.

[Mtnjim]

@Wrlprchnx

Don’t worry… the economy dips back into recession late in 2011 when Bush’s tax cuts expire.

Don’t worry about it, it’ll only be for the Bentley, Rolls Royce and private jet companies.

[Warren]

There is a lot of treasury debt that needs to be rolled over this year (and another spike in mortgage resets). If interest rates go up it will just be that much more difficult for the government to finance the deficit. Same is true for state and local governments.

If interest rates stay low, it is as PheroQuirk says, back to bubble mania, malinvestment and an inevitable round of even bigger corporate implosions.

Government spending programs can create jobs, but the same amount spent by the private sector creates more jobs. That’s why tax cuts help the economy more than stimulus programs. Of course, both would be nice, but then you’re back to wildly printing money. The dollar is already headed into a death spiral.

Using realistic accounting measures, a 100% tax rate would not come close to closing the budget deficit. We’re just a few years away from the point where a 100% tax rate will not even pay interest on the federal debt. And that’s assuming we don’t all stop working when the government takes all our wages.

Big changes coming soon, a Greater Depression or Weimar style inflation, probably both.

[Wrlprchnx]

@Warren

Using realistic accounting measures, a 100% tax rate would not come close to closing the budget deficit. We’re just a few years away from the point where a 100% tax rate will not even pay interest on the federal debt. And that’s assuming we don’t all stop working when the government takes all our wages.

You are being hyperbolic here Warren - the US’ debt to GDP ratio is still well below that of many nations with much higher taxation rates. Germany is probably the best example - Germany has great productivity, fewer natural ressources than the US and I believe higher taxation… Their Debt to GDP is worse but is not spiralling out of control.

IF the US stops spending as much as it is spending on wars well outside it’s borders I think you will find the economic picture looks ALOT rosier.

[tacitus]

Signs are improving… modestly… the Fed’s Beige Book describes tepid upturns in all of the reporting districts.

IMHO, the deepest problems are structural, therefore hard to quantify, and not conducive to being formed into easy sound bites.

The first and most significant structural change is that the USA is partially transforming from a speculative economy (in part due to the age drift of the general population) which was ready, willing, and able to participate in a series of speculation manias, or “upwaves” in Elliott Wave theory…

The real estate upwave had great self amplifying power because of the multiplier effect for real estate investements, calculated at roughly 1.6…

This means that money pouring into real estate had many powerful monetary echoes that resonated with every infusion of money, rather like the feedback loop from microphone to amplifier at a concert.

Structurally, our population is now moving into a different mode, far more conservative, with a major concern for health care. Health Care is calculated to have a far lower multiplier effect, so instead of being a metaphorical echo chamber, is is closer to a dead anechoic recording booth where the acoustic energy rapidly decays to silence.

Real Estate will still be with us, albeit in a severly hobbled form. Lending will be cautious instead of reckless, the concept of “flipping” is probably long past, there is a huge inventory in both commercial and residential real estate that will slowly fill, and the credibility of sercuitized debt products has been vastly reduced.

Secondly, the American workforce is also experiencing structural changes toward a contractor-temp model, very mobile, with no long term loyalty or sense of obligation, nor anything approaching the job security of the middle of the 20th century. This does seem to bode a major transformation in the broad sense that risk has been offloaded from the corporate structure onto the back of the employee. The corporate shell can restructure like an older just-in-time manufacturing model with no retention problems… in other words we are seeing the mass commodification of the workforce, especially the much touted Millenial Generationn who are now transitioning from school to employment.

This strongly suggests that the next generation will gravitate to more conservative, low volatility investment strategies and a hedge against high volatility employment conditions… they will once again view houses as homes and not investment strategies.

The third unavoidable factor is the slow transformation of the Middle East into a theater of Permawar… a slow, corrosive, low grade conflict that is ruinously expensive to engage and unacceptably dangerous to disengage.

Historically, wars have been the single greatest factor in the long term decline and ruin of nations, a reality our adversaries are all too well aware of. Their strategy is to slowly bleed us to exhaustion with a variant on the method developed by Feliks Dzerzhinsky, giving the adversary the false impression of substantial success, causing said adversary to commit more resources under the false impression that victory is within grasp, then slowly drain and exhaust each initiative until the adversary is internally spent. Sadly, Americans are not diligent students of history.

Permawar is now creating a subculture of the citizen-warrior and the contractor-warrior who do rotations between civian life and military life. Entire new industries have grown up which privately source advanced provisions to these forces, higher quality armor, weapons parts less prone to jamming, protective eyewear made of super-polymers that can withstand shrapnel, etc. The implication is that the soldier is also now in some respects acting as a self directed, semi privatized unit responsible for his own well being out to be disturbing to anyone alert to the implications of that.

[Wrlprchnx]

It’s lucky however that technological solutions are allowing America to direct fewer ressources towards war as time drags instead of having to allocate more and more ressources.

[PheroQuirk]

http://research.stlouisfed.org/publications/review/06/07/Kotlikoff.pdf

@Federal Reserve Bank of St. Louis Review

Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation’s economic future.

marc faber: the next thing you need to worry about is the piigs: Tech Ticker, Yahoo! Finance

The US crisis won’t hit us this year or next year. But within 5-10 years, the United States will be forced to quietly default on its debt, most likely by printing money and destroying the value of the currency.

The main problem comes down to two things: 1) ballooning debts and 2) future interest costs.

As these charts from Faber’s Gloom, Boom, And Doom Report show, in the past decade, the U.S. government’s total debt and liabilities have gone through the roof, especially when Fannie, Freddie, Medicare, and Social Security are taken into account. This trend is unsustainable, and it will correct itself only through a rapid acceleration of economic growth and tax revenues, a new-found financial discipline, or a crisis–or a combination of all three.

The second problem is interest costs. Right now, the government’s debt and deficits aren’t creating an undue burden because the government can borrow so cheaply. Eventually, however, as the country’s financial situation gets weaker, interest rates will likely rise, and our interest costs will go through the roof.

According to Faber, our annual interest costs currently amount to 12% of the government’s tax revenue. Within five years, Faber estimates, these costs will soar to 35% of tax revenue. This will force the government to cut spending (unlikely) and/or frantically print money.

[Wrlprchnx]

Canada made it through paying 35% of our budget on servicing our debt after the failed nationalization experiment of the 1970’s

I believe it still accounts for somewhere in the 20% range.

[Warren]

This from Porter Stansberry:

It’s one of those numbers that’s so unbelievable you have to actually think about it for a while… Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that’s not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That’s an amount equal to nearly 30% of our entire GDP.

When governments go bankrupt it’s called “a default.” Currency speculators figured out how to accurately predict when a country would default. Two well-known economists - Alan Greenspan and Pablo Guidotti - published the secret formula in a 1999 academic paper. That’s why the formula is called the Greenspan-Guidotti rule. The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world’s largest money management firm, PIMCO, explains the rule this way: “The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support.”

The principle behind the rule is simple. If you can’t pay off all of your foreign debts in the next 12 months, you’re a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It’s a guaranteed default. The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world’s largest holder). That’s 16,267,000 pounds. At current dollar values, it’s worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that’s roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether… that’s around $500 billion of reserves. Our short-term foreign debts are far bigger.

Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we’re still going to come up nearly $3 trillion short. That’s an annual funding requirement equal to roughly 40% of GDP. Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or the Russian central bank, which have stopped buying Treasury bills and begun to buy enormous amounts of gold.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

This from John Williams:

The government does put out financial statements usually in December using generally accepted accounting principles, where unfunded liabilities like Medicare and Social Security are included in the same way as corporations account for their employee pension liabilities. And in 2008, for example, the one-year deficit was $5.1 trillion dollars. And that’s instead of the $450 billion, plus or minus, that was officially reported.

These numbers are beyond containment. Even the 2008 numbers, you can take 100 percent of people’s income and corporate profit and you’d still be in deficit. There’s no way you can raise enough money in taxes.

If you eliminated all federal expenditures except for Medicare and Social Security, you’d still be in deficit. You have to slash Social Security and Medicare. But I don’t see any political will to rein in the costs the way they have to be reined in. There’s just no way it can be contained. The total federal debt and net present value of the unfunded liabilities right now totals about $75 trillion. That’s five times the level of GDP.

[tacitus]

You would enjoy Meltdown Iceland by Roger Boyes… apparantly Boyes has managed to step on a few toes in witing this book… he describes Iceland as a scale model economy alerting us to what may go wrong with full sized economies.

[PheroQuirk]

@tacitus

You would enjoy Meltdown Iceland by Roger Boyes… apparantly Boyes has managed to step on a few toes in witing this book… he describes Iceland as a scale model economy alerting us to what may go wrong with full sized economies.

Thanks for the book recommendation.

I think it is far too early to have a good sense over what will happen to Iceland. Possibly though the concern over the current account deficit is somewhat misplaced - a big part of this was due to smelter construction, and as smelter output comes online, the situation ought to improve.

Our root problem today is much bigger than a purely financial crisis - it is a crisis of governance and our institutions. From that perspective, socially cohesive Iceland might be much better placed to deal with the difficult years ahead than the societies of the UK or US.