Monday, February 6, 2012

The Jobless Recovery: A Train Wreck Waiting To Happen

The essay below pretty much uncovers the CON in confidence:

The Burning Platform

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as the final and total catastrophe of the currency involved.” – Ludwig von Mises

The last week has offered an amusing display of the difference between the cheerleading corporate mainstream media, lying Wall Street shills and the critical thinking analysts like Zero Hedge, Mike Shedlock, Jesse, and John Hussman. What passes for journalism at CNBC and the rest of the mainstream print and TV media is beyond laughable. Their America is all about feelings. Are we confident? Are we bullish? Are we optimistic about the future? America has turned into a giant confidence game. The governing elite spend their time spinning stories about recovery and manipulating public opinion so people will feel good and spend money. Facts are inconvenient to their storyline. The truth is for suckers. They know what is best for us and will tell us what to do and when to do it.

The false storyline last week was the dramatic surge in new jobs. This fantastic news was utilized by the six banks that account for 80% of the stock market trading to propel the NASDAQ to an eleven year high and the Dow Jones to a four year high. The compliant corporate press did their part with blaring headlines of good cheer. The entire sham was designed to make Joe the Plumber pull out one of his 15 credit cards and buy a new 72 inch 3D HDTV for this weekend’s Super Bowl. When you watch a CNBC talking head interviewing a Wall Street shyster realize you have the 1% interviewing the .01% about how great things are.

What you most certainly did not hear from the MSM is that the NASDAQ is still down 42% from its 2000 high of 5,048. None of the brain dead twits on CNBC pointed out the S&P 500 is trading at the exact same level it reached on April 8, 1999. Twelve or thirteen years of zero or negative returns are meaningless when a story needs to be sold. On Friday the hyperbole utilized by the media mouthpieces was off the charts, leading to an all-out brawl between the critical thinking blogosphere and the non-thinking ”professionals” spouting the government sanctioned propaganda. Accusations flew back and forth about who was misinterpreting the data. I found it hysterical that anyone would debate the accuracy of BLS (Bureau of Lies & Swindles) data.

The drones at this government propaganda agency relentlessly massage the data until they achieve a happy ending. They use a birth/death model to create jobs out of thin air, later adjusting those phantom jobs away in a press release on a Friday night. They create new categories of Americans to pretend they aren’t really unemployed. They use more models to make adjustments for seasonality. Then they make massive one-time adjustments for the Census. Essentially, you can conclude that anything the BLS reports on a monthly basis is a wild ass guess, massaged to present the most optimistic view of the world. The government preferred unemployment rate of 8.3% is a terrible joke and the MSM dutifully spouts this drivel to a zombie-like public. If the governing elite were to report the truth, the public would realize we are in the midst of a 2nd Great Depression.

The unemployment rate during the Great Depression reached 25%. Without the BLS “adjustments” the real unemployment rate in this country is 23%. Cheerleading and packaging the data in a way to mislead the public does not change the facts:
There are 242 million working age Americans. Only 142 million Americans are working. For the math challenged, such as CNBC analysts, that means 100 million working age Americans (41.5%) are not working. But don’t worry, the BLS says the unemployment rate is only 8.3%. Things are going so swimmingly well in this country the other 33.2% are kicking back enjoying the good life.
The labor force participation rate and employment to population ratio are at 30 year lows. The number of Americans supposedly not in the labor force is at an all-time record of 87.9 million. A corporate MSM pundit like Steve Liesman would explain this away as the Baby Boomers beginning to retire. Great storyline, but the facts prove that old timers are so desperate for cash they have dramatically increased their participation in the labor market.

The data being dished out by the government on a daily basis does not pass the smell test. The working age population since 2000 has grown by 30 million people. The number of people working has grown by only 4.7 million. A critical thinker would conclude the unemployment rate should be dramatically higher than the reported 8.3%. But the government falsely reports the labor force has only increased by 11.8 million in the last eleven years. They have the gall to report that 17.9 million Americans just decided to leave the workforce. The economy was booming in 2000. It sucks today. Don’t more people need jobs when times are tougher? The Boomers retiring storyline has already proven to be false. The fact that 46 million (15% of total population) people are on food stamps is a testament to the BLS lie. A look at history proves how badly the current figures reek to high heaven:
2000 to 2011 - Not in Labor Force increased by 17.9 million.
1990′s – Not in Labor Force increased by 5 million.
1980′s – Not in Labor Force increased by 1.7 million.
The Not in the Labor Force category is utilized to hide how bad the employment situation in this country really is. They conclude that 17 million out of 38 million Americans between the ages of 16 and 24 are not in the labor force. That is complete bullshit. From the time I turned 16, I worked. Everyone I knew worked. I worked through high school and college. It is a lie that 45% of these people don’t want a job. If you dig into their data, you realize the horrific state of employment in this country:
74% of 16 to 19 year olds are not employed
85% of black 16 to 19 year olds are not employed
31% of black 25 to 54 year old men are not employed
40% of 20 to 24 year olds are not employed
22% of 25 to 29 year old males are not employed
22% of 50 to 54 year old males are not employed
According to the BLS, 11% of men between 25 and 54 are not in the labor force

Not only is real unemployment at Depressionary levels, but those that do have jobs are falling further and further behind. Wages have gone up less than 2% in the last year and have been rising at an annual rate below 3% for the last four years. According to our friends at the BLS, inflation has risen 3% in the last year. This is almost as ludicrous as their unemployment rate. Anyone living in the real world, as opposed to the BLS model world, knows that inflation on the things we need to live has been rising in excess of 10%. It is a fact that if you measure CPI exactly as it was measured in 1980, at the outset of our great debt inflation, it exceeds 10% versus the fake 3% reported without question by the MSM to a non-thinking public. A poor schmuck making the median salary of $25,000 who gets a 2% raise thinks he has $500 more to spend when in reality he has lost $2,000 of purchasing power. Federal Reserve created inflation is an insidious hidden tax that destroys the 99%, while enriching the 1%.

Until Debt Do Us Part

“Insanity is doing the same thing, over and over again, but expecting different results.” – Albert Einstein

The recovery storyline being touted by the oligarchy of politicians, bankers and media is designed to make consumers feel better. This is a key part of their master plan. Any honest assessment of the financial disaster that struck in 2008 would conclude it was caused by too much debt peddled to too many people incapable of paying it back, too few banks having too much power, the Federal Reserve keeping interest rates too low for too long, and that same Federal Reserve doing too little regulating of the Too Big To Fail Wall Street mega-banks. I wonder what Albert Einstein would think about the “solutions” rolled out to fix our debt problem. Would he find it insane that total credit market debt has actually risen to an all-time high of $53.8 trillion, up $533 billion from the previous 2008 peak? Our leaders have added $6.1 trillion to our National Debt in the last four years, a mere 66% increase. This unprecedented level of borrowing certainly did not benefit the American people, as real GDP has risen by $96 billion, or 0.7%, over the last four years.

Would Einstein find it insane that the governing elite would encourage the 4 biggest banks, that were the main culprits in creating a worldwide financial collapse, to actually get bigger? The largest banks in the U.S. now control 72% of all the deposits in the country versus 68.5% in 2008. The Too Big To Fail are now Too Bigger To Fail. Rather than liquidating the bad debts, breaking up the insolvent banks, selling off the good assets to well run banks, firing the executives, and wiping out the shareholders & bondholders foolish enough to invest in these badly run casinos, the powers that be chose to protect their fellow .01% brethren and throw the 99% under the bus.

Ben Bernanke, in conjunction with Tim Geithner and his masters on Wall Street, implemented a zero interest rate policy designed to enrich the Wall Street banks, force investors into the stock market, and encourage Americans to borrow and spend like it was 2005 again. Rather than accepting that our economy has been warped for decades, with over-consumption utilizing debt as the driving force, and allowing a reset, the Federal Reserve insanely encouraging banks and consumers to do the same thing again. We do know Bernanke has stolen $450 billion of interest income going to savers and senior citizens and handed it to Jamie Dimon, Vikrim Pandit, Lloyd Blankfein and the rest of the Wall Street cabal. The “austerity is bad” storyline is pounded home on a daily basis by the politicians, corporate chieftains, Wall Street billionaires, and MSM pundits. The definition of austere is “practicing great self-denial”. Did you see the mob scenes on Black Friday? Americans are incapable of any self-denial, let alone great self-denial, and the masters of our country will not allow it to happen. One look at our GDP figures confirms the non-austerity occurring in this country. In 2007, prior to the collapse, consumer spending accounted for 69.7% of GDP. Today, consumer spending accounts for 71% of GDP, with investment accounting for 12.7% of GDP. In the good old days of 1979 prior to the epic debt bubble, when the financial industry do not run this country, consumer spending accounted for 62% of GDP and investment accounted for 19% of GDP. What an insane concept. You spend less than you make and save the difference. You then invest that money where you can get a reasonable return (.15% in a money market account is not exactly reasonable).

As Ludwig von Mises pointed out, a false boom created by credit expansion will ultimately collapse. We had the chance in 2008 – 2009 to voluntarily abandon the Wall Street induced credit expansion and allow our country to reset. The pain and misery would have been great, especially for the 1% who own most of the stocks, bonds and peddle the debt to the ignorant masses. As you can see in the chart below, the powers that be need debt per employed American to grow at an ever increasing rate to maintain their power and wealth. The miniscule reduction in debt from 2009 to 2011 was unacceptable. The governing powers will not be satisfied until von Mises’ final currency catastrophe is achieved.

Bernanke and his Wall Street puppet masters’ plan is actually quite simple. It’s essentially a confidence game. A confidence game (also known as a con, flim flam, gaffle, grift, hustle, scam, scheme, or swindle) is an attempt to defraud a group by gaining their confidence. The people who commit such tricks are often known as con men, con artists, or grifters. The con man often works with one or more accomplices called shills, who help manipulate the mark into accepting the con man’s plan. In a traditional confidence game, the mark is led to believe that he will be able to win money or some other prize by doing some task. The accomplices may pretend to be random strangers who have benefited from successfully performing the task. Bernanke and the 1% are the con men. They are attempting to defraud the 99% by convincing them their “solutions” will benefit them. The shills acting as accomplices are Wall Street bankers, bought off economists, politicians, journalists, and mainstream media pundits. You are the mark. The game has multiple facets but is based on more freely flowing low interest easy debt. The con man has reduced interest rates to zero at the behest of his puppet masters. The Wall Street accomplices offer enticing financing to the marks for big ticket items like automobiles, furniture and electronics. As the marks go further into debt, the Wall Street shills report record earnings ($26 billion from loan loss reserve accounting entries), consumer spending rises and GDP goes higher. The mainstream media accomplices dutifully report an improving economy. The government accomplices massage the employment and inflation data and declare a jobs recovery with no inflation. The marks are supposed to feel better about the future and spend even more borrowed money. This is what is considered a self-sustaining recovery by the psychopaths running this country.

All you have to do is open your daily paper to see the confidence game in full display. Last week the MSM reported another surge in automobile sales. Our beloved American automobile manufacturers are back baby!!! Automobile sales are now pacing above 14 million on an annual basis. This is up from the depths of the recession in 2009 when the annual rate was below 10 million. We’ve breached the Cash For Clunkers level and there is nowhere to go but up. The storyline is that Obama was right to save GM and Chrysler with your tax dollars. They are now making splendid vehicles (except for the exploding Chevy Volts) and employing millions of Americans. This is a true American comeback success story. Clint Eastwood should do a commercial about it.

There is one little problem with this storyline. It’s bullshit. Remember GMAC? You bailed them out when all their subprime auto and mortgage loans went bad in 2009. They have a brand new business plan. Change your name to Ally Bank and start making as many subprime auto loans as possible. You will be happy to know that according to Experian, 45% of all auto loans being made today are to subprime borrowers. What could possibly go wrong? In addition, the average loan term has grown to almost 6 years. Executives at Ally Financial said that subprime car lending had become “very attractive” because profit margins on the loans more than cover the cost of expected losses from borrowers who fail to repay what they owe. I’m sure they have everything completely under control. Gina Proia, a company spokeswoman, said the company places “greater emphasis on the higher end of the nonprime spectrum” and only lends to people who show they can pay. I can’t believe they are restricting their loans to only people who they think can pay. I’m surprised Obama isn’t condemning them for such restrictive loan terms. If you open your paper to the auto section you will see financing offers of $0 down-payment, and 0% interest for 7 years across the board on most models. But why buy, when you can lease a luxury automobile for $300 per month? It is simply amazing how many vehicles you can “sell” when “credit challenged” Americans can rent them for seven years. I wonder if this explains why I see dozens of $40,000 luxury autos parked in front of $25,000 dilapidated hovels during my daily commute through West Philadelphia. It also seems the Big Three are “selling” a few extra vehicles to their dealers in January as pointed out by Zero Hedge. No need to let a few facts get in the way of a feel good story.
Ford month-end inventory 86-day supply at end of Jan. (492k vehicles) vs 60-day supply (466k) as of Dec. 31
Chrysler had 83-day supply (349k units) end of Jan. vs 64-day (326k units) as of Dec. 31
GM month-end inventory 89-day supply (619k units) vs 67-day supply (583k) Dec. 31

The facts prove the issuance of billions in easy credit is creating the illusion of recovery. Non- revolving (auto & student loans) consumer credit outstanding is now at an all-time high of $1.7 trillion. Even with billions in bad debt write-offs since 2009 the amount outstanding has risen by $100 billion. Does this sound like austerity is gripping the nation? The Federal government is dishing out student loans like candy, as hundreds of thousands of students get worthless degrees from for-profit diploma mills like the University of Phoenix and its ilk. By keeping them occupied in school, the government is able to keep them in the Not in the Labor Force category. Not to be outdone, our friends at GE Capital, Wells Fargo and the other too big to fail entities have been doing their part on the revolving credit side of the scam. I’ve recently been seeing an ad by the largest U.S. furniture retailer, Ashley Furniture, offering 0% interest with no payments for 7 years. I don’t know about you, but my kids destroy a couch in less than 7 years. Wells Fargo Credit doesn’t seem too worried. A critical thinker might ask, how can Wells Fargo possibly make money offering these terms? But there is the rub. Ben Bernanke is loaning Wells Fargo money at 0% so they can perpetuate the confidence game. These insane bankers truly believe they can kick start this moribund debt saturated economy by issuing billions more in debt to people incapable of repaying them. Einstein would be amused.

The McKinsey Group put out a report a couple weeks ago analyzing the amount of American household debt and optimistically concluding that it could be back on a sustainable path by 2013. Mike Shedlock pointed out that sustainable is in the eye of the beholder. It seems the bright fellows at McKinsey haven’t grasped the concept of regression to the mean. First of all their analysis is flawed because real disposable personal income is actually declining and Ben Bernanke’s master scam is working and Americans are now adding to their household debt. The little blue line has turned upwards since they gathered their data. Secondly, as Mish so accurately points out, the sustainable level of household debt is really at the levels prior to the debt bubble that began in the early 1980s. That is a debt level of approximately 70% of disposable personal income, as opposed to the current level of 110%.

The implications of household debt levels regressing to their long-term mean would be catastrophic to the 1%. Their kingdom of debt would come crashing down. Their power and wealth would be swept away. This is why it is so vital for them to create the illusion of recovery. Their confidence game is built upon an ever increasing flow of credit expansion. It will not work. There is no avoiding the final collapse of a boom created solely by credit expansion. Those in power will never voluntarily relinquish their grand game of pillaging the wealth of the nation, so economic collapse will be the ultimate result. They will continue to use propaganda, printing presses, and half-truths to further their agenda. But those who examine the facts will come to a logical conclusion that we are being sold a great lie.

“Half the truth is often a great lie.” – Benjamin Franklin

Two Freight Trains Collide Head-On

The Financial Crisis Of 2008 Was Just A Warm Up Act For The Economic Horror Show That Is Coming

The Economic Collapse
February 6, 2012

The people out there that believe that the U.S. economy is experiencing a permanent recovery and that very bright days are ahead for us should have their heads examined. Unfortunately, what we are going through right now is simply just a period of “hopetimism” between two financial crashes. Things may seem relatively stable right now, but it won’t last long. The truth is that the financial crisis of 2008 was just a warm up act for the economic horror show that is coming. Nothing really got fixed after the crash of 2008. We are living in the biggest debt bubble in the history of the world, and it has gotten even bigger since then. The “too big to fail” banks are larger now than they have ever been. Americans continue to run up credit card balances like there is no tomorrow. Tens of thousands of manufacturing facilities and millions of jobs continue to leave the country. We continue to consume far more than we produce and we continue to become poorer as a nation. None of the problems that caused the crisis of 2008 have been solved and we are even weaker financially than we were back then. So why in the world are so many people so optimistic about the economy right now?

Just take a look at the chart posted below. It shows the growth of total debt in the United States. During the financial crisis of 2008 there was a little “hiccup”, but the truth is that not much deleveraging really took place at all. And since the recession “ended”, total credit market debt has gone on to even greater heights….

So what does this mean for the future?

Well, if a small “hiccup” in the debt bubble caused so much chaos back in 2008, what is going to happen when this debt bubble finally bursts?

That is something to think about.

Sadly, most Americans seem oblivious to all of this.

If you go out to malls in the wealthy areas of America today, people are charging up a storm. In all, Americans charged a whopping 2.5 trillion dollarson their credit cards during 2011. Way too many people have already forgotten the lessons that we all learned back in 2008.

Of course some Americans pay off their credit cards every month, but way too many Americans are not doing that. In 1980, Americans were carrying 54 million dollars in revolving credit balances. Today, Americans are carrying794 million dollars in revolving credit balances.

And student loan debt is an even bigger bubble than credit card debt is. As I have written about previously, total student loan debt in America is rapidly approaching a trillion dollars.

So it looks like U.S. consumers have not learned to stay away from debt.

That is not good.

Well, what about the banks?

Has the financial system learned any lessons since 2008?

No, not really.

Sadly, the “too big to fail” banks are now even bigger than ever. The total assets of the six largest U.S. banks increased by 39 percent between September 30, 2006 and September 30, 2011. If they were to fail today, they would be even more of a threat to our financial system than they were back in 2008.

And our major banks continue to be very highly leveraged. In fact, major banks all over the world are absolutely swamped with debt.

The following statistics come from Zero Hedge….

The U.S. banking system is leveraged 13 to 1.

The Japanese banking system is leveraged 23 to 1.

The French banking system is leveraged 26 to 1.

The German banking system is leveraged 32 to 1.

These are insane levels of leverage, and they are just inviting another major financial crisis.

Do you all remember Lehman Brothers? The fact that they were leveraged so highly is what did them in back in 2008. When the value of their holdings declined by just a little bit they were totally wiped out.

Well, during this next financial crisis large financial institutions are going to be wiped out all over the world. Major banks all over the globe are going to be crying out for more bailouts when things take a turn against them.

They are making the exact same mistakes that they made before, and they are going to be expecting more government handouts when things go bad.

Will we ever learn?

So obviously the banking system has not learned any lessons.

What about the federal government?

Well, if you follow my blog regularly, you know that I love to write about how horrific U.S. government debt is.

Unfortunately, over the past four years things have gotten so much worse.

Back in 2008, the U.S. national debt crossed the 10 trillion dollar mark.

Just recently, it crossed the 15 trillion dollar mark.

So now we are in a much weaker position financially to respond to another major financial crisis.

Just check out the chart posted below. This is a recipe for national financial suicide….

During fiscal 2011, the Obama administration stole close to 150 million dollars from our children and our grandchildren every single hour.

At the moment, the legacy of debt that we are passing on to future generations is sitting a grand total of $15,351,406,294,640.49.

But keep in mind that it is going up every single hour.

Meanwhile, our ability to service that debt is declining. We are rapidly getting poorer as a nation.

During 2011, the amount of money that left the United States exceeded the amount of money that entered the United States by more than a half a trillion dollars.

This gap is called a trade deficit, and it is absolutely ripping our economy to shreds.

For a moment, imagine Uncle Sam standing next to a giant pile of money on a map of the United States. Then imagine a half a trillion dollars being taken out of that pile every single year.

So why haven’t we totally run out of money yet?

Well, it is because we borrow those dollars back. In order to maintain our false standard of living, our federal government, our state governments and our local governments have to go out and beg the rest of the world to lend us our dollars back.

Sadly, our government schools have “dumbed-down” the population so much that most of them don’t even know what a “trade deficit” is anymore.

Meanwhile, our economic infrastructure is being gutted like a fish.

Look, I know that I go over this point over and over and over, but it is absolutely imperative that we all understand this.

The half a trillion dollars a year that leaves this country every year could have gone to support businesses and jobs inside the United States.

But instead it is going to support businesses and jobs on the other side of the world.

The consequences of this are absolutely devastating.

According to U.S. Representative Betty Sutton, an average of 23 manufacturing facilities a day closed down in the United States during 2010. Overall, more than 56,000 manufacturing facilities in the United States have shut down since 2001.

Even many so-called “American companies” have been bought up by the rest of the world. The following comes from a recent article posted on Economy In Crisis….

RCA is now a French company, Zenith is a Korean company. Frigidaire is a Swedish company. IBM’s Personal Computer Division—with its 500 patents—is now a Chinese company. Westinghouse Nuclear Energy’s major shareholder is Toshiba—a Japanese Company. Lucent Technologies, a former research division of AT&T, along with all the patents acquired from the beginning of the phone system, is now a French company. In 2008, Brazilian-Belgian brewing company InBev purchased the iconic American brewer Anheuser-Busch, makers of Budweiser. With the sale of these manufacturing companies, the future profit and technologies all belong to foreign entities.

We once had the greatest economic machine in the history of the world.

Now it is being dismantled and bought up by foreigners.

When America’s economic infrastructure declines, that means that there are less jobs available for all of us.

As I wrote about the other day, the employment situation in this country is not getting better and we have never even come close to recovering from the recession that started back in 2008.

During 2008 and 2009, the U.S. economy lost millions of jobs. Since the beginning of 2010, the percentage of the U.S. population that has had a job has remained very stable….

Normally, when a recession ends the percentage of Americans that have a job bounces back pretty dramatically.

So considering the fact that the employment situation has never recovered from the last financial crisis, what is going to happen when the next financial crisis hits?

And most of the jobs that have been “created” during this so-called “recovery” have been low income jobs. In fact, if you look closely at the employment numbers that were released last Friday, you will find that the vast majority of the “new jobs” were part-time jobs.

But you cannot pay a mortgage and support a family on a part-time job.

Sadly, the truth is that median household income in America has been steadily dropping over the past several years. Tens of millions of American families are deeply struggling and more Americans than ever are falling into poverty.

Back in the year 2000, about one out of every nine Americans was living in poverty. Today, about one out of every seven Americans is living in poverty.

All of this is causing a great deal of anxiety in America today. Large numbers of Americans know that something has fundamentally changed, even if they don’t understand the specifics. That is one reason why sites such as this one have become so popular. People want some answers.

And once people get some answers about what is really happening, they tend to want to prepare for the hard times that are coming.

In a few days, a new series on National Geographic entitled “Doomsday Preppers” premieres. The mainstream media is starting to take notice of the growing “prepper” movement in America today. It is estimated that there are at least 2 million “preppers” in the United States at this point. Of course people are “prepping” for a whole host of reasons, but the number one concern among most groups of preppers is the economy.

As the economy crumbles, more Americans than ever have decided that it is not a good thing to be 100% dependent on the system.

Back in 2008 and 2009, millions of Americans suddenly lost their jobs. Because they did not have any finances stored up, large numbers of them also lost their homes. Many went from being solidly middle class to being out on the street in a matter of months.

That doesn’t have to happen to you. Instead of blowing your money on frivolous things, do what you can to set something aside for the difficult times that are on the horizon.

A lot of those “in the know” are quietly making their own preparations. For example, legendary film director James Cameron (Avatar, Titanic and Terminator) has purchased more than 2600 acres of farmland in New Zealand and he is getting out of the U.S. for good apparently.

Unfortunately, most of us do not have the resources for something like that. But what most of us can do is we can change our priorities and start focusing on the things that will help us survive the hard times that are coming.

So are you ready?

How to Prolong an Inevitable Market Correction

02/06/12 Baltimore, Maryland – Last week came and went. As near as we could tell, nothing was settled. The trends in motion stayed in motion… No end in sight.

On Friday, Americans were still convinced that they were never going broke. The Europeans were still squabbling about how they were going to keep from going broke And the Japanese were telling each other that going broke wouldn’t be so bad.

For the United States of America, the road to hell has never been so smooth. The country has been borrowing its way to ruin for many years. But now, the skids are greased. The wheels are oiled. Strap on your seat belt. Whee!

Lenders practically insist that the US government take their money. Reuters reports:

The US government may ask investors to pay for the privilege and safety of holding short-term debt issued by its Treasury Department.

In response to clamor from investors, the Treasury said on Wednesday it was looking closely at allowing negative-yield auctions. This would mean bidders who want the security of US government debt in the face of global insecurity, might have to pay a premium for it.

Doing so would allow the US government to benefit from something that is already occurring on the secondary market, where investors have accepted negative yields in recent months to protect their cash from financial strains.

Remarkably, Wall Street is asking to be able to pay a premium for US debt even after the United States lost its prized AAA rating last year and as the government heads for a fourth straight year with $1 trillion-plus budget deficit.

“It is the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible,” according to minutes of the Treasury Borrowing Advisory Committee, which includes 21 financial institutions that make markets for US government securities.

On Tuesday, the nonpartisan Congressional Budget Office said the United States was headed for a fourth straight year of $1 trillion-plus budget deficits, a condition that Republicans want to use as ammunition to hammer President Barack Obama’s spending record in the November voting.

Debt is still rising. At some point, it has to stop. Then, the feds go broke.


Because they are all living on borrowed time and borrowed money, only paying current expenses — including the interest on past borrowing — by borrowing more and more money. When the borrowing stops, they will no longer be able to pay their bills. And when that happens, their bonds will drop in value — fast. Governments will go broke. So will all the people who depend on the feds and their IOUs. Banks. Insurance companies. Retirees. Investors. The defense industry. The education industry. The healthcare industry.

Will this be a bad thing? Not necessarily. What has to happen sometime might as well happen now; get it over with. The longer debt builds up, unchecked, the more debt there is to liquidate when the end comes. Better for the end to come sooner, rather than later, in other words. If the end were allowed to come, we’d soon be at the beginning again.

But if there was one theme that ran through all the “Capitalism in Crisis” essays it was this: the end must be prevented, at all costs. Capitalism is inherently unstable, the writers agreed. Governments must use their power to keep it from going nuts. Otherwise, it may put an end to things.

We disagree. Markets — free markets — are meant to be unstable. They are meant to crack-up from time to time. And thank God they do. Otherwise, we’d be stuck forever with zombie industries and dead end investments. Every once in a while, capitalism throws a tantrum. But so what? Crises, breakdowns, crashes, washouts, liquidations — they’re just fast and efficient ways to get rid of the zombies.

And it’s not just developed countries that are subject to the temper fits of capitalism. Even China — a country still run by people who call themselves communists — is subject to capitalism’s mood swings.

Here’s a report from Bloomberg:

China’s economy is headed for a “hard landing” this year as weaker demand overseas chokes off exports, said Gary Shilling, who correctly forecast the US recession that began in December 2007.

A Chinese government report yesterday showed that export orders fell last month even as manufacturing expanded. The Shanghai Composite Index (SHCOMP) dropped 1.1 percent yesterday as stronger manufacturing boosted concern that the world’s second-largest economy will decelerate further as the government refrains from loosening monetary policy to tame inflation and curb property prices.

“They slammed on the brakes,” Shilling, president of A. Gary Shilling & Co., a Springfield, New Jersey-based consultancy firm, said at the Bloomberg Link China Conference in New York yesterday. “Transition is not easy because they are geared up to exports.”

China’s economy expanded 10.4 percent annually in the past 10 years, five times the pace of the US, as the government boosted spending on roads and bridges and manufacturers exported everything from toys to socks. Shilling defines a hard landing as a growth rate below 6 percent.

The economy grew at a 9.2 percent rate in 2011 and its expansion will slow to 8.5 percent this year, according to economists’ estimates compiled by Bloomberg.

Shilling, 74, has been calling for a hard landing in China since at least a year ago, advising clients to sell copper and the Australian dollar as a play on the downturn.

Shilling forecast the US recession in 2007 and warned investors a year earlier that residential real estate was a bubble about to burst. As the Standard & Poor’s 500 index fell [to] a more-than 12-year low in March 2009, he said that higher unemployment would curb consumer spending, leading to “weaker stocks.” The gauge has since rallied 96 percent.

Nobody can be right all the time. Even here at The Daily Reckoning, our timing is occasionally off — by a year or two. After all, we figured the US stock index, the Dow, would be down to 6,000 by now. We thought the post-crisis bounce would have come to an end years ago. Instead, the Dow is over 12,000…and still bouncing along.

But give it time!

Bill Bonner
for The Daily Reckoning

In a note to the folks at GATA []

Issuance Of Negative Yield (Treasury) Bills

Bill...I have attached an article you may find of interest. The Treasury Borrowing Advisory Committee "broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical."

The committe based its opinion on allowing the market to function "properly". I find this argument to be somewhat troubling as the Federal Reserve has seen to it that the Treasury market not function properly at every point along the yield curve. By monetising(buying) intermediate to long term Treasuries the Fed has pushed rates down, making intermediate/long term Treasuries unattractive and forced money into the short term Treasury bill market. I find the committee's advise to be disingenuous which suggests an agenda more in line with its members self interest. JP Morgan and Goldman Sachs can not make money if everyone's money is parked in Treasury bills.

Obviously negative yield Treasuries would be an attempt to force people out of short term Treasuries into higher spread, higher risk longer term debt or equity instruments and/or to spend dollars that would stimulate the economy in support of the current administration in an election year. As the market grasps the prospect of negative yield auctions money is likely to migrate into equities and other alternative investments ahead of the actual event. The corporate world has trillions in short term Treasuries for working capital and liquidity purposes in addition to trillions stashed away in money market funds by the public and foreign central banks. With the roadmap of paper money becoming a liability rather than a store of value, the only real money(that can't be printed and has been an effective store of value for more than five thousand years) is likely to become a primary beneficiary. Market psychology can turn on a dime. So don't be surprised if we find ourselves engulfed in a panic move into gold sometime this year as word of this story filters into mainstream media.

Stay well. Warmest personal regards, Gary

From ZeroHedge

One of the laments of the uberdoves in the world over the past several years has naturally been the fact that interest rates are bound by Zero on the lower side, and that the lowest possible rate on new paper is, by definition, 0.000%. Which is what led to the advent of QE in the first place: in lieu of negative rates, the Fed was forced to actively purchase securities to catch up to a negative Taylor implied rate. This may be about to change, because as the just released letter from the Treasury Borrowing Advisory Committee, or as we affectionately called the JPMorgan/ Goldman Sachs Chaired committee, the "Supercommittee That Runs America", simply because it alone makes up Tim Geithner's mind on what America needs to do funding wise, demand, "It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical." And what JP Morgan and Goldman Sachs want, JP Morgan and Goldman Sachs get. And once we get the green light on negative yields at auction, next up will be the push for the Fed to impose negative rates on all standing securities, which means that coming soon savers will be literally paying to hold cash. And that will be the final straw.

Not only that, but beginning in just 4 short months, the Treasury may launch a brand new product: a Floating Rate Bond. From the TBAC:

The second charge was to explore the viability of Treasury issuing floating rate notes (FRNs). In particular, the presentation [attached] assessed potential client demand, optimal maturity, reference index, and reset frequency. The structural decline in the stock of global high-quality government bonds, coupled with an increase in demand for non-volatile liquid assets, should make U.S. government issued FRNs extremely attractive. Pricing for a hypothetical two year FRN was estimated to be in the arena of 3 month Treasury bills plus 8 basis points.

A discussion then ensued over whether 3 month Treasury bills or Fed Funds Effective was the more appropriate floating rate index. In conjunction with fixed-rate issuance, FRNs give Treasury an attractive alternative to increase the average maturity of its debt. While more analysis on the specifics of the program must be done, the Committee was unanimously in favor of Treasury issuing FRNs.

As a reminder, this is what Treasury's Mary Miller said earlier:

Treasury continues to study the possibility of issuing Floating Rate Notes (FRNs). The Treasury Borrowing Advisory Committee suggested in its February 2012 charge that FRNs could complement Treasury’s current suite of products.

Treasury recognizes that FRNs may provide a number of benefits to government finance, and plans to announce a decision regarding whether or not to introduce an FRN product at the May 2012 Quarterly Refunding.

Ealier we were kidding about that PIMCO gold fund. Now that we look at tit, it may not have been a joke...

From the just released TBAC letter:

Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association


January 31, 2012

Dear Mr. Secretary:
Since the Committee last met in early November, economic activity has continued to expand, and real GDP increased at a 2.8% annual rate in the fourth quarter, the fastest pace of growth in over a year. The acceleration in activity last quarter was supported by a rebound in stockbuilding, as businesses returned to building up inventories following the more cautious attitude displayed in the third quarter. Inventories added 1.9%-points to last quarter’s gain in output, following a third quarter in which stockbuilding subtracted 1.4%-points from growth. The lift from replenishing lean stocks helped support manufacturing production, which expanded at a 3.9% annual rate in the fourth quarter.

With inventories now better aligned with final sales, the support to industry from a positive turn in the inventory cycle will likely diminish. In addition, slowing global growth may exert a damping effect on US factory output. Despite these headwinds, early manufacturing surveys for January suggest the factory sector is faring well early in the year. Automaker production schedules indicate that this key sector should continue to expand in the current quarter.

Real consumer spending increased at a 2.0% annual rate last quarter. Spending growth was particularly strong for consumer durables; a normalization of auto and truck inventories after the Tohoku earthquake supported vigorous growth in light vehicle sales, which climbed to a 13.6 million annual pace of sales by year-end. Modest but steady gains in labor income are providing support to consumers. Employment has increased by 137,000 jobs per month on average in the fourth quarter, and the average work week increased last quarter after declining in the third quarter. Consumer spending was also supported by a decline in retail gasoline prices, undoing some of the drag on purchasing power witnessed earlier in 2011. Even so, the holiday shopping season was a modest disappointment. One possible explanation is that households are seeking to bring saving rates back up, after lowering saving earlier in the year to smooth consumption growth in the face of the hit from higher energy prices. So far, indicators regarding consumer spending in early 2012 are mixed.

After growing vigorously for much of the expansion, real business fixed investment spending cooled off to a 1.7% pace of growth last quarter. Real outlays for equipment and software expanded at a trend-like 5.2% annual rate. Meanwhile, business spending for structures surprisingly declined at a 7.2% rate. Spending on mining-related structures fell off sharply, as lower natural gas prices have reduced the economic feasibility of capital spending in this area. Residential investment, however, expanded at a 10.9% pace. While housing indicators generally remain mixed, there have been some encouraging signs recently, particularly a jump in homebuilder sentiment. Mortgage rates have recently fallen to new all-time lows, providing an important support to housing demand.

Declines in real government spending continue to drag on overall economic growth. Real government outlays declined at a 4.6% annual rate last quarter. The decline was exaggerated by a big drop in the volatile defense spending category. While this decline may be partly reversed in coming quarters, real defense outlays are generally set to trend lower. Real outlays by state and local governments declined at a 2.7% rate, the 13th decline in the last 16 quarters. Late last year, policymakers extended expiring payroll tax and unemployment benefit provisions. Those programs are now extended through late February, and most analysts expect they will be extended through year-end.

Real exports expanded at a 4.7% pace, the same as in the third quarter. However, growth in foreign markets has slowed decisively, from Europe to large Emerging Market countries including China and Brazil, and this slowdown should be expected to restrain export growth before long. While the trade spillovers from slower European growth are likely to have a negative effect on the US economy, sentiment regarding financial spillovers has improved recently, as aggressive actions by the ECB to provide liquidity to the banking system has helped to stabilize the sovereign debt crisis.

Inflation has moderated in recent months, largely due to a decline in energy prices. In the three months ending in December, the PCE price deflator increased at only a 0.1% annual rate. Outside of food and energy, core consumer prices increases have also been modest as the core PCE deflator increased at a 1.4% annual rate in the past 3 months and 1.8% over year ago. The easing in commodity prices has taken some pressure off of core goods prices, and the normalization of vehicle inventories has allowed vehicle prices to cool off after surging earlier in 2011. Even though the unemployment rate fell by a half percentage point last quarter, wage inflation remains subdued: average hourly earnings are up only 2.1% on a year-ago basis. Contained labor costs should continue to limit the pace of consumer price inflation.

Monetary policy has remained active. At the January FOMC meeting, the Federal Reserve unveiled new Committee forecasts for the path and timing of interest rates. Moreover, the FOMC statement pushed back the guidance on the time for the first rate hike, from mid-2013 to late 2014 at the earliest. The revised guidance has further served to keep interest rates quite low. For now, it would appear the Fed has exhausted their options for easing policy through communications. The prospects for further asset purchases remain in flux. Committee members have publicly expressed differing views on the desirability of such action. But, importantly, Chairman Bernanke’s comments in the Q and A following his recent press conference lowered the bar considerably for further Fed asset purchases.

Against this economic backdrop, the Committee’s first charge was to examine what adjustments to debt issuance, if any, Treasury should make in consideration of its financing needs. The Committee did not feel that any changes to Treasury coupon issuance were necessary at this time.

There was a lengthy discussion regarding the bid-to-cover ratios at recent Treasury bill auctions. It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical.

The second charge was to explore the viability of Treasury issuing floating rate notes (FRNs). In particular, the presentation [attached] assessed potential client demand, optimal maturity, reference index, and reset frequency. The structural decline in the stock of global high-quality government bonds, coupled with an increase in demand for non-volatile liquid assets, should make U.S. government issued FRNs extremely attractive. Pricing for a hypothetical two year FRN was estimated to be in the arena of 3 month Treasury bills plus 8 basis points.

A discussion then ensued over whether 3 month Treasury bills or Fed Funds Effective was the more appropriate floating rate index. In conjunction with fixed-rate issuance, FRNs give Treasury an attractive alternative to increase the average maturity of its debt. While more analysis on the specifics of the program must be done, the Committee was unanimously in favor of Treasury issuing FRNs.

In the final charge, the Committee considered the composition of marketable financing for the remainder of the January 2012 to March 2012 quarter and the April 2012 to June 2012 quarter. The committee’s recommendations are attached.

Matthew E. Zames [JP Morgan]
Ashok Varadhan [Goldman Sachs]
Vice Chairman

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