Daily Digest 2/7 - Rethinking The Great Recession, A Modest Proposal, Oil Tankers After The Egyptian Crisis

• Headlines:

U.S. faces $70 billion inflation hit

Food prices forecast to rise by 5 per cent in Canada

Investors Have $102 Billion Bet on Gold, Silver Gains

Fiscal Deficit Unsustainable: BOJ Chief

Skipped payments fueled pension crisis, actuary says (NJ)

Americans Will Flock Into $5,000 Gold and $500 Silver (InflationUS Video)

Sugar Shortage Looms as Storm Ruins Australian Crop

Bernanke Bets Commodities Won't Fan Inflation Concern

Corn Rises to 30-Month High as U.S. May Cut Inventory Estimate

Corn, Soybean May Rise on Speculation Global Supply Tightening

U.S. Cotton Acres to Rise by 14% After Price Surge, Group Says

Russia Follows China in Using Reserve Ratios to Curtail Inflation Threat

U.S. Homeowners in Foreclosure Process 507 Days Late Paying at End of 2010

Brent crude oil climbs back above $100 on Egypt

Scores wounded in Bangladesh clashes (Video)

Sinai pipeline blows up (Video)

Turkish protesters clash with police (Video)

Egypt cbank reduces size of t-bills offering-banker ("average yield of 91-day bills sold on Monday was about 11 percent, up from 9.5 percent at the last sale")

I believe he does have some cost shifting in mind, but at least he's making a serious proposal.  During the last campaign the Rs were promising $100B in cuts.  As of this past weekend, it's down to $35B.  Who are they kidding?  The deficit is $1.4 trillion with a T.  If interest rates start going up that pittance will be erased in a heartbeat by interest payments on the Federal debt.

I don't think we can count on the current DC crowd doing anything meaningful.

Doug

You betcha.  

http://money.cnn.com/2011/02/07/pf/credit_card_interest_rate/index.htm

The article quotes people discussing the preposterous rates (59.9%, 79.9%) in a matter-of-fact way.  

Just another sign of how far we are through the looking glass.  Whatever economic game we're all involved in here, it's over.  There's still residual momentum, I guess, but the jig is *up*...

Viva anyway -- Sager

But my questions are: Can we avoid the financial collapse anyway? Is cutting the government spending could really change the outcome?

With the assumption that cheap energy times are over and consequently real GDP growth is over (and most likely GDP will have to decrease with energy cost rising) it's not only that we have to reduce the deficit by $1.5T a year but we would have to continue cutting spending beyond that every year as the GDP decreases.  Is it just mathematically possible?

I keep this image in mind from the Crash Course with the stadium being filled by these drops doubling every minute. Even if you double the size of the stadium you only add 1 minute to the outcome.

So if we reduce our deficit by 50%, are we just adding 1 minute until the financial outcome?

Don't get me wrong, I'm not saying we shouldn't try at least, but I'm wondering how much time we would buy by doing so? Or is there still a way to save the system or is too late already?

I don't have any illusion that we are probably far past the point of no return.  And if your completely in Chris's camp that debt based money must alway grow (I still have my reservations - but agree that is true in our current situation), then you have to believe it will collapse no matter what happens.  However, that doesn't mean we should just put on the gas.  That simply results in more malinvestment into unsustainable things - just look at the retail space and housing still be built despite huge gluts.  We are still encouraging people to go to college and run up student loan getting a liberal arts degree despite the fact that many will never get a job that allows them to pay back the degree.  As long as we continue to allow government to fund programs and projects that have no negative feedback loop, then we will continue to squander resources and potentially miss other opportunities that don't get a chance because they are starved for resources due to our ever growing government.

This is another one of those situations where it's easy to point to the evil credit card company if you don't think about why this situation occurs.  It's a good sound byte that outrages peoples and pushes for more government involvement which only makes it worse.  Here's why:

If you happen to have been irresponsible in the past and ended up with a bad credit rating, how do you improve it?  Can you really survive in the world without a credit card, particularly if you have to travel?  You can't rent a car, you can't buy things on-line (think airline tickets), and you have a strong government push to eliminate cash, so what do you do?

So you have to go to a sub-prime credit card lender (such as the one in the article).  You have to actually be responsible and only buy what you can afford.  You have to make payments on time and eventually you should get a better credit rating and then you can change to a prime lender.  But what would you do if there were no sub-prime lenders?  How would you ever re-establish credit worthiness?

So now look at it from the lenders side.  They enter the market because there is a demand that is not being met by the prime lenders (won't lend to borrowers with bad credit).  However, it's really really risky.  The default rates are probably north of 50% and it's very hard to collect because of many collection regulations put in place (good or bad judgments aside - they raise the cost considerably).  The government has put lots of regulations limiting how the credit card companies can operate, so they have to basically raise the cost for everyone since trying to target specific risks is less possible.  You may think that the 79.9% rate is highway robbery, but I bet they aren't making anymore profit than the prime lenders.

So you say, well that's just awful, so what do you do?

• Outlaw sub-prime lending - now you've just left someone who screwed up once with no way to recover.
• Massively regulate sub-prime lending - lenders go out because they can't make a profit so it's better to use the money in some other way, and you end up at the same result as outlawing sub-prime lending. Or a worse outcome is you push lending underground so you end up with broken knee-caps.
• Require prime lenders to lend to sub-prime borrowers - that raises the cost for everyone, is unfair because the responsible are punished for the irresponsible.  Eventually resulting in revolt by the responsible, and you move to ...
• Nationalized lending or government guarantees - So now the tax payer is on the hook and once again the responsible are punished.  Fannie Mae and Freddie Mac are good examples of this scenario.

So while it's easy to vilify companies like First Premier as being evil, are they really?  If you find it outrageous, what would you require as interest to lend to someone with bad credit?  How about if you lend to them and discover if they just default you have little recourse?

Ultimately you have to keep responsiblity with the borrower and lender.  The more government involvement raises costs for everyone.

Actually -- unless I've got JO wrong (but I'm sure about where I'm coming from) -- the point is that some people should not have credit cards.  As I said, they have an infantile grasp of money and debt.  It's like letting a 2-year-old have the car keys.

You can buy things online with a debit card, if you must buy something online.

V/S

No disagreement from me.  But who should get to make the decision on who is smart enough and who is not?  I say it has to be between the borrower and the lender.  If the borrower doesn't like the terms, then they can say no.  It's also the responsiblilty of the lender to look out for their best interest as well in deciding to whom they should lend.  Voluntary on all sides.

True - I never consider using a debit card because you have much fewer protections against fraud than with a credit card. I'm not sure how much this changed with the Credit CARD Act.

I have been uncovered

I've been reading here on CM for 2 years now.  I think this is my first post, but I may be wrong.  So...  $500B in cuts.  What we have in our country is a very tangled web of both negative and postive feedback loops.  I see the government as mostly payroll and not consuming very much (not including defense/military).  I'm just throwing random numbers out.  First a high-ball.  60% of government spending is payroll.  Of the $500B cut, $300B is payroll.  Supposing most government workers are earning $60k annually, they would qualify for the maximum unemployment benefit of $25k annually (using a round number). Divide 25 into 60 and you have 40-ish percent.  Now instead of a $300B cut, you really only did about $180B.  20-ish% tax revenue is lost for the $180B, so that's another $35B.  Pull that out of the $180B and now you have $135B in actuall net savings.  Add that to your $200B in purchasing cuts and your $500B turned into only $335B.  If you lowball and say 40% is payroll, similar math brings it to around $400B.  My opinion on the matter is that at best we would probably only see 75% efficiency in the final results. 

Now for an encore:  I crunched some numbers based on how I think the world is reacting to us bumping into our debt ceiling - AGAIN.  We will hit this ceiling in March, and we'll be 1/4 the way through a $1.5T expected defecit for the year.  If they raise it the 1.9T that I've been hearing, that gives us a new ceiling of $16.2T.  It sounds unlikely we would go past that without some heavy austerity measures.  Based on the projections for 2012 defecit, we would hit that $16.2 trillion somewhere in the neighborhood of August to September of 2012.  Supposing we got a proposed $500B haircut package pushed through and it came in at $400B for results, that would possibly cancel out 1/3 of the 2012 defecit, this buying us another 4 months, thus giving us an end-game date of Dec2012/Jan2013 (what was that? I thought I heard a Mayan say something....) 

Lastly....  I do not take into account 1) inflation, 2) rising interest rates, 3) stock-market being less than flat.  Any of these three items adds to the deficit and shortens a possible end game date.  I realize this is a bit of a slop-job, but I welcome others to work from the platform where I just performed a dusting and set up a spotlight.

Hey Johnny O,

be careful when you walk down the street these days.

http://dl.dropbox.com/u/20625040/to%20good%20to%20ignore%20Kopie.jpg

If one stock-picker emerged intact from the wreckage of the financial crisis, it was Meredith Whitney.

CNBC Meredith Whitney on Closing Bell

With a prescient warning about bank stocks in 2007 — as well as a gift for the perfect sound bite — she became a media darling, celebrated in a Fortune cover article and in frequent television appearances as a market seer.

Until now, that is. These days, Ms.Whitney, 41, finds herself pilloried in the news media and by colleagues for predicting a calamity in municipal bonds.

Critics say the call is overstated, but it has alarmed investors in that usually sleepy market.

Ms.Whitney is also drawing scrutiny from Washington, where a Congressional panel will meet on Wednesday to examine the turmoil in the muni bond market, including whether Ms.Whitney’s call has fed the volatility and allowed some investors to profit unfairly.

Citing scheduling conflicts, Ms.Whitney has declined an invitation to appear before the panel of the House Oversight and Government Reform.

But the subcommittee’s chairman, Representative Patrick T.McHenry, Republican of North Carolina, said that would not dissuade him from investigating her record.

“This isn’t a gotcha thing, but she’s going to be part of the hearing, whether or not she participates,” he said. “If she doesn’t want to come forward in a venue like this, that makes a statement.”

Ms.Whitney has not been shy about making statements in the past, whether it was delivering bold predictions about unemployment or dressing up as Paris Hilton for her firm’s Halloween party.

 But her scathing report on deteriorating state finances in September, followed by an appearance on “60 Minutes” in December, has been catnip to her critics.

 “There’s not a doubt in my mind that you will see a spate of municipal bond defaults,” she said in the “60 Minutes” interview. “You could see 50 sizable defaults, 50 to 100 sizable defaults, more. This will amount to hundreds of billions of dollars worth of defaults.”

Normally, Wall Street analysts are loath to criticize one another, at least on the record.

But since then, even fellow analysts are calling her out for stepping beyond what she knows, bank stocks, into less familiar territory.

Others, especially municipal bond market players, have gone on the warpath.

“I’ve seen a copy of the report, and frankly, I’ve seen better papers from graduate students in finance,” said Richard P.Larkin, director of credit analysis at Herbert J.Sims & Company, a municipal bond broker and underwriter. “It’s ludicrous, reckless and irresponsible, and it’s being done without any regard for the consequences.”

Investors were pulling money out of municipal bond funds even before Ms.Whitney’s appearance on Dec.19, but in the weeks since, the pace of withdrawals has accelerated, with more than $14 billion coming out between Dec.22 and Feb.2.

Ms.Whitney declined to comment for this article.

But a number of academics and others who have studied pension, health care and other obligations of states and municipalities say bigger problems loom than just short-term budget deficits that stem from the recession.

They see structural problems that may require decisive, painful action in the most indebted places.

But it is Ms.Whitney’s contention that hundreds of billions of dollars’ worth of defaults could come to pass that has aroused a firestorm.

“Meredith’s analysis highlighted problems in the muni market that have been known for years,” said Josh Rosner, a structured finance analyst at Graham Fisher & Company.

Still, she has gone too far in his view.

“She drove a rush to the exits,” he said, “which wasn’t about the fundamentals, but about a momentum trade.”

Tommygun wrote:

Just a note of interest....I have been a retail merchant for 23 years, and I have 90 % of my customers paying with credit cards, I have to pay the banks (visa-mastercard, AMEX, Discover) a processing fee ranging from 2% up to 3.1%  on each transaction. They just suck it out of my account. They call it the "discount rate".

So do you have to pay this fee if I use a debit card with a Visa logo ? Just curious....

Ericg

I agree that the laws we have seen recently are definitely not really aimed at the consumer but make a good sound bite.  I also was quite shocked that merchants didn't revolt with the pass thru fees for the frequent flyer cards.  I felt those should have been eaten by the issuing banks (bank that issues credit card - consumer side)  as they are the ones that gain the marketing advantage.

However, there are advantages and disadvantages to all forms of payments for both the merchant and consumer - even with cash.  Different payment types cash, credit, debit, check, ACH, paypal, phone, ... all have different costs associated with them either through fees paid or indirect costs.

From a consumer point of view, I nearly always use credit cards (my preference).  I don't have to carry cash (less theft risk), don't have to go to the bank/ATM to get cash (theft risk, inconvenience, reduced driving), no worries about counterfeit bills, protection from fraudulent merchants or products (merchant charge--back), easy tracking of purchases/money management/budgeting (trade off is government snooping), theft protection in that if stolen I'm not out anything (better protection in this area than debit/check/ACH).  Also some credit cards offer enhanced warrantees if you use them for a purchase.

Of course, as a merchant there are costs that you pay and I'm fully aware that you have to pass those costs on to your customers - anyone who thinks otherwise is just naive (this applies to all those wonderful helpful government programs/regulations as well) - but I will tell you I do on occasion avoid merchants that don't accept my prefered payment method (but that's my choice as it is the merchants).  From a cash perspective you have costs as well: risk of counterfit bills, risk of theft due to large cash on hand (insurance/legal issues if a theft occurs and someone is injured) and during deposit, reduced sale potential when a customer doesn't have cash on hand but does have another payment method.  Also, if you happen to have international clients you don't have to deal with currency exchange issues with a credit card.

As a savy consumer, for any large purchases I know you as a merchant have increased your costs to cover credit cards, so I always try to negotiate a cash discount.

Also, for anyone thinks cash protects you from government snooping, just try and buy something with a large amount of cash (> $10K).  You have forms to fill out at the bank and forms to fill out at the merchant.

re:Tommygun

Problem is, those retailers don't OFFER me a cash discount so I HAVE to use my credit card to get something extra out of the transaction.

I'd use a lot more cash if there were incentive to do so.

(case in point...there's a Gas station that doesn't take credit cards...they're about $.20 a gallon cheaper than the 3 stations around them so I gladly fuel up there with cash..still, there are plenty of people gassing up at the more expensive stations...don't ask my why)