Daily Digest

Daily Digest - June 5

Friday, June 5, 2009, 9:49 AM
  • Two Depressions
  • WHO ARE THOSE GUYS
  • This is a Depression-sized event. ...
  • Senate Sabotages Ron Paul's Bill to Audit the Fed (MachineHead)
  • Laughter from Audience
  • Kasriel: ‘greater risk for the global economy…is inflation’
  • Trend? (Chart 30yr bond)
  • How Much is Reagan Responsible for Bailout Nation ?
  • 24,700,000 Unemployed or Underemployed Americans: Job Losses Accelerate with 6 million unemployed over last year. Real Unemployment rate now at 15.8 Percent.
  • Steve's Economic Forum, Aaron Moyer Episode 7 (Podcast)
  • A Bubble that Nobody is talking about
  • Bernanke Calls for Deficit Reductions
  • No Buyers of IOUs: Latvia funding crisis
  • Talks Stewart Brand on squatter cities (TEDVideo)
  • Peter Schiff Vlog Report 02 june 2009 (Video H/T iDoctor)

Economy

Two Depressions [PLEASE USE LINK THERE ARE A LOT OF CHARTS ON PAGE, THANKS]

The world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.

WHO ARE THOSE GUYS?

This is a Depression-sized event. ...

Barry Eichengreen and Kevin O'Rourke at Vox EU sketch out graphical comparisons in industrial output, work stock markets and trade, as well as measures of policy response:

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event. ...

The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.

Particularly marked is the stunning crash in global trade, far exceeding the early months of the great depression. This makes some sense, as crossborder shipping and supply lines are a much greater part of the global economy than then. But in a very real sense this implies only a higher ledge from which to fall.

Among developed nations a lot of the economic collapse has been shunted off onto Japan, thanks to a surfeit of excess capacity in high value goods for export and the unwinding of the massive yen carry trade. Germany and China have also suffered tremendously, though in China's case the fact is often obfuscated. Also quickly getting the knife have been small countries/currencies with high trade deficits -- Iceland, eastern Europe -- who have experienced catastrophic currency collapses that have crushed their access to global markets.

The United States, much like the British Empire of the 1930s, has ridden a safe-haven reserve currency and its status as the global source of excess demand into a relatively softer decline. The story here is by no means over -- as monetary policy has been sidelined by the collapse of borrowing, government fiscal policies globally will be critical in determining how far the collapse goes before cash flows stabilize. This particularly figures to be a problem in Europe under the restricitons of the Maastricht treaty; Ireland is a poor example of europe as a whole, having had more in common with a Euroized Iceland, but this could become an altogether too common and tragic theme.

“The S&P downgrade was a kick up the backside,” said Jim Power, chief economist at Friends First in Dublin. “There is a short-term firefighting issue in the budget and a longer-term sustainability issue.”

(More)

 Senate Sabotages Ron Paul's Bill to Audit the Fed (MachineHead)

A Huffpo article says that the Senate version of Ron Paul's bill to audit the Fed is being watered down into meaninglessness. Here are the key paragraphs --

Legislation to give Congress greater oversight of the Federal Reserve was severely watered down on the Senate floor Wednesday in private negotiations between two powerful Republican senators. On the Senate floor, Grassley named the top Republican on the banking committee, Richard Shelby of Alabama, as the man pouring the water.

"Although I would have preferred to include all of the Fed's emergency actions under 13(3), in consultation with Senator Shelby I agreed to limit my amendment to actions aimed at specific companies," said Grassley.

"This modified version of the amendment does not give GAO authority to look at all of that additional taxpayer risk. It is much narrower than the one I originally filed, but it is a reasonable step in the right direction, and it does not threaten monetary policy independence."

The Huffpo article doesn't include a byline, so there's no way to assess the credibility of the author. But the writer's claims are in line with historical evidence that any real reform of U.S. government invariably gets derailed.

Senator Shelby can be seen on TV when Ben Bernanke testifies before the Senate committee which oversees the Fed. Senator Shelby also is interviewed frequently on CNBC. In both of these venues, he comes across as fiscally conservative and well informed.

The disturbing implication of this article is that he's playing a double agent role -- claiming to be overseeing the Fed, while actually carrying water on its behalf to block transparency and public oversight.

I hope it's not true. But after 95 years of Federal Reserve secrecy, it seems unlikely that the veil is suddenly going to be lifted on this government-sponsored counterfeiting cartel. Shine a light into its dark recesses, and the feasting cockroaches all would have to scurry away.

Laughter from Audience

BEIJING, June 1 (Reuters) - U.S. Treasury Secretary Timothy Geithner on Monday reaffirmed his faith in a strong dollar and reassured the Chinese government that its huge holdings of dollar-denominated assets are safe.

"We believe in a strong dollar," Geithner said in a question-and-answer session after a speech to students at Peking University.

A major goal of Geithner's maiden visit to China as Treasury secretary is to allay Beijing's concerns that Washington's mushrooming budget deficit and ultra-loose monetary policy will undermine both the dollar and U.S. bonds. China is the biggest foreign owner of U.S. Treasury bonds.

"Chinese financial assets are very safe," Geithner said. His response drew laughter from the audience. [emphasis mine]

Kasriel: ‘greater risk for the global economy…is inflation’

I will not keep you in suspense. I believe that the greater risk for the global economy in general and the U.S. economy in particular is inflation, not deflation. I arrive at this conclusion both on secular and cyclical grounds.

For the record, I believe deflation is the greater risk right now. However, when the reflation play takes hold (and I believe it will do by Q4 or Q1 at the latest), inflation will be the real threat. So I agree with Kasriel. Think $100 oil or higher for starters. Commodities are going to be a good play all around.

Trend? (Chart 30yr bond)

How Much is Reagan Responsible for Bailout Nation?

Paul Krugman has a fascinating OpEd today, essentially tracing the current economic crisis all the way back to Ronald Reagan.

In Bailout Nation, I place a small measure of blame on Reagan for a) appointing Greenspan; and b) being the intellectual father of the radical deregulation movement.

Krugman goes much further than I. Beyond the financial deregulation issue, he mentions something I was unaware of: Eliminating the down payment requirements of home buying:

“But there was also a longer-term effect. Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending — restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down.

These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis, and were trying to prevent another. But by 1980 the memory of the Depression had faded. Government, declared Reagan, is the problem, not the solution; the magic of the marketplace must be set free. And so the precautionary rules were scrapped.

Together with looser lending standards for other kinds of consumer credit, this led to a radical change in American behavior.”

Astonishing.

Allow me to put Professor Krugman’s criticism into a little context, via Chapter 3 of Bailout Nation:

“The market for financing homes was quite different in the 1920s and 1930s than it is today. There were no such things as 30-year, fixed-rate mortgages. Instead, the typical mortgage was an interest-only loan for a period ranging from three to five years. These non-amortizing mortgages called for a balloon payment upon maturity. Most were renewed without much fuss—assuming the borrowers had maintained their jobs and payment histories.

As the 1930s economy went from bad to worse, this cozy home financing arrangement ran into trouble. Home prices entered into a steep decline. A cash-strapped populace, suffering from massive job losses, was frequently unable to meet its mortgage payments.

In History and Policies of the Home Owner’s Loan Corporation, C. L. Harriss writes, “What had generally been regarded as a reasonably sound arrangement by all parties concerned proved to be very weak when a set of interrelated forces combined to bring on a severe depression after 1929 and to disrupt seriously the structure of home-ownership finance.”

I am curious about one thing: Does anyone know specifically what legislation Krugman was referencing that eliminated the down payment requirement ?

24,700,000 Unemployed or Underemployed Americans: Job Losses Accelerate with 6 million unemployed over last year. Real Unemployment rate now at 15.8 Percent.

Unemployed: 13,700,000
Part-time but looking for full-time: 8,900,000
Marginally Attached and Discouraged Workers: 2,100,000

This brings our total to 24,700,000. That is why when we go back to the 1982 unemployment rate of 10.8%, we are even in worse shape today because how the employment numbers are calculated. Part-time workers looking for full-time work are such a big group but are considered employed by the U-3 headline number and they should not be. I think most people would say that someone working part-time at a Wal-Mart because they are trying to make ends meet does not constitute being fully employed. This is why we are seeing deflationary pressure hitting the market.

Steve's Economic Forum, Aaron Moyer Episode 7 (Podcast)

A Bubble that Nobody is talking about

In 1965 one in ten Americans owned stocks. In 1990, one in five Americans owned stocks. Put another way, it took 25 years for stock ownership to double in the US. And most of that growth came between 1983 and 1990 with the introduction of 401(k)s, IRAs and other stock-based retirement plans: suddenly anyone with a large scale employer could invest in stocks without having to open a brokerage account.

Thanks to the Internet and low fee online brokerage accounts, it only took seven more years for stock ownership to double AGAIN. Put another way, the rate at which new participants entered the stock market accelerated four fold between 1990 and 1999. By the end of the 20th century, 48% of US households owned stocks.

This is the one bubble no one talks about.

I’m talking about the bubble in “investing in stocks.” Never before have so many Americans done this. It gave us one of the biggest bull markets in stock history: a mega-18 years run from 1982 to 2000. But it also means that stocks have got a long ways to fall to get back in line with their historic relationships to other asset classes.

Particularly gold.

A lot of commentators talk about how gold is near an all-time high and that stocks have fallen 50%, making them cheap again. However from a long-term perspective, gold and stocks are nowhere near their normal relationship.

According to Dr Marc Faber, editor of the Gloom Boom Doom Report, gold and stocks move in distinctive long-term trends. Over the last 110 years, these trends has staged six major phases:

1900-1929: stocks outperform gold
1929-1932: gold outperforms stocks
1932-1966: stocks outperform gold
1966-1980: gold outperforms stocks
1980-2000: stocks outperform gold

2000-???: gold outperforms stocks

Bernanke Calls for Deficit Reductions

In testimony before the House of Representatives today, Chairman of the U.S. Federal Reserve Ben Bernanke urged lawmakers to reduce ballooning budget deficits. While short-term challenges are important, Bernanke said, attention must be paid to longer-term fiscal policy.
"Over the long term, achieving fiscal sustainability...requires that spending and budget deficits be well controlled," Bernanke said. He warned that "we will not be able to continue borrowing indefinitely."

No Buyers of IOUs: Latvia funding crisis

Via zero hedge:

In an overlooked piece of data, indicating that the 3 month rally is likely done, yesterday EU-member Latvia saw its overnight interbank rate surge to a record 16.4% while the overnight deposit rate double to 24% after the country was unable to sell any debt securities at a local debt auction, according to its main stock exchange. The Latvian Treasury had offered to sell 20 million lats ($20 million) of July maturities, 10 million of September, December and June 2010 paper. None of this paper found any buyers.

I twittered a couple Eastern Europe articles from ft alphaville on the train this morning: Latvian devaluation has moved into the realm of anticipated certainty with many voices supporting it. One has to imagine Estonia and Lithuania, and perhaps others, will follow with a little time.

Talks Stewart Brand on squatter cities (TEDVideo)

Peter Schiff Vlog Report 02 june 2009 (Video H/T iDoctor)

 

9 Comments

idoctor's picture
idoctor
Status: Diamond Member (Offline)
Joined: Oct 4 2008
Posts: 1731
Re: Daily Digest - June 5

Jim Rogers on CNBC. commodities vs US treasury bonds ?!?!

One1776's picture
One1776
Status: Bronze Member (Offline)
Joined: Jan 24 2009
Posts: 52
Who is buying gold?!?!?!

Northwestern Mutual and China

idoctor's picture
idoctor
Status: Diamond Member (Offline)
Joined: Oct 4 2008
Posts: 1731
Re: Daily Digest - June 5

This doesn't look very good. Consumer Credit Plunges by $15.7 Billion.

http://www.cnbc.com/id/31128685

CyntiaK's picture
CyntiaK (not verified)
Wedding expenses

[Ed. note: Spam]

homestead's picture
homestead
Status: Bronze Member (Offline)
Joined: Apr 16 2008
Posts: 54
Re: Wedding expenses
CyntiaK wrote:

 One of the biggest expenditures a person will make in their lifetime is on wedding expenses.  Wedding expenses have skyrocketed over the last couple decades, thanks in no small part to marketing departments finding something else to cash in on and inflate cost.  It takes some hefty personal loans to put one on – over $20,000 is the average – that's a lot of money.  Then you have wedding gifts, and after all of it are said and done, the marriage begins.  (Technically a violation of the 8th Amendment provision against cruel and unusual punishment.)  Most of the costs are consumed by jewelry, favors, and venue, but mostwedding expenses brings a need for debt relief.

Spending all that money on getting married is just plain wrong.  Over the past 30 years the popularity of putting on an extravaganza has grown out of control.  It seems to me that it's primarily a woman thing; I don't see that most men do the planning for a wedding.  It's gone from being a pleasant celebration in a church fellowship hall to being a catered dream-of-a-lifetime launching for the family princess.  No matter that either the parents are drained of soon to be needed retirement funds, or that either they or the couple are saddled with debt.  We won't even breathe the unspoken thought that half the marriages end in divorce anyway.  It's almost as if they put on a major wedding event so that they are enveloped in a romantic production that will magically ensure a forever marriage.  After all, how could anything go wrong when there's such a fantastic beginning?  No matter that the planners have suspended their financial wits and ignored being good stewards of the family finances. 

What ever happened to common sense?

Best wishes, homestead grandma

 

Denny Johnson's picture
Denny Johnson
Status: Gold Member (Offline)
Joined: Aug 13 2008
Posts: 348
Re: Daily Digest - June 5

Thank you, Grandma, well said.

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
Re: Wedding expenses
homestead wrote:

Spending all that money on getting married is just plain wrong.  Over the past 30 years the popularity of putting on an extravaganza has grown out of control.  

Grandma -

Cat and I plan on being on the far left of the bell curve on this one so we will do our part to pull the average back to reason.

homestead wrote:

It seems to me that it's primarily a woman thing; I don't see that most men do the planning for a wedding.  

I'm not touching this one other than to say you are 1000% correct....

homestead wrote:

It's gone from being a pleasant celebration in a church fellowship hall to being a catered dream-of-a-lifetime launching for the family princess.  <snip>

What ever happened to common sense?

Alive and well in Virginia Beach.  Cat and I had a deal with our daughter - we would either pay for graduate school or the wedding.  She ended up earning a Teacher's Assistant grant that paid for her senior year at Virginia Tech.  Then she earned a Graduate Assistant grant for her first year of grad school and then a Research Assistant grant for her final year of grad school.  She's done and back home.

The only catch is she forgot to renegotiate the deal when she earned her TA so the whole deal is null and void.  Now I don't have to pay for anything.............

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - June 5

 I won't comment on the 8th amendment or the common sense or the male or female making the decision but I have to tell you I might be too happy to drudge up any of my usual Grim Reaper economic news this weekend.

Thanks for the smiles!

BTW did I miss something in the torture comment that caused it to get flagged?

 

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
Re: Daily Digest - June 5

Davos -

You didn't miss anything - Cynthia K's post was spam for some money store scam.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments