Three Government Reports Point to Fiscal Doomsday

For what it’s worth.

From MoneyAndMarkets.com:

When our leaders have no awareness of the disastrous consequences of their actions, they can claim ignorance and take no action.

Or when our leaders have no hard evidence as to what might happen in the future, they can at least claim uncertainty.

But when they have full knowledge of an impending disaster … they have proof of its inevitability in ANY scenario … and they so declare in their official reports … but STILL don’t lift a finger to change course … then they have only one remaining claim:

INSANITY!

And, unfortunately, that’s precisely the situation we’re in today: Three recently released government reports now point to fiscal doomsday for America; and one of the reports, issued by the Congressional Budget Office (CBO), says so explicitly:

  • The CBO paints two future scenarios for the U.S. budget deficit and the national debt. But it plainly declares that fiscal disaster will strike in EITHER scenario. Furthermore …  

  • The CBO states that its fiscal disaster scenarios could cause severe economic declines for decades to come, including hyperinflation and destruction of retirement savings.  

  • The CBO then proceeds to admit that even its worse-case scenario could be understated by a wide margin due to panic in the financial markets or vicious cycles that are beyond control.  

  • Separately, in its Flow of Funds Report for the second quarter, the Federal Reserve provides irrefutable data that we are already beginning to witness the first of these consequences in the United States: an unprecedented cut-off of credit to businesses and consumers.  

  • Meanwhile, the Treasury Department shows that America’s fate remains, as before, in the hands of foreigners, with the U.S. still owing them $7.9 trillion!  

  • And despite all this, neither Congress nor the Obama Administration have proposed a plan or a timetable for averting these doomsday scenarios. Their sole solution is to issue more bonds, borrow more, and print more without restraint.

That is the epitome of insanity.

Yes, the great government bailouts of 2008 and 2009 have bought us some time … but they have promptly proceeded to sell us into bondage.

Yes, they have given us safe passage over tough seas … but only to throw our assets onto the global auction block for the highest bidders.

The one bright spot: Unlike some governments, ours does not conceal the evidence of its folly. Quite the contrary, the proof pours forth from these three government reports in relatively blunt language and unmistakably blatant numbers …

Report #1
Congressional Budget Office (CBO):
The Long-Term Budget Outlook

CBO Reort

The CBO opens with a chart predicting the most dramatic surge in government debt of all time.

It shows that even in proportion to the larger size of the U.S. economy today, the government debt has ALREADY surpassed the massive debt loads accumulated during World War I and the Great Depression … and will soon surpass even the massive debt load of World War II.

“Large budget deficits,” write the authors of the CBO report, would …

  • Reduce national saving,” leading to …  

  • More borrowing from abroad” and …  

  • Less domestic investment,” which in turn would …  

  • Depress income growth in the United States,” and …  

  • Seriously harm the economy.”

Worse, on page 14, the CBO warns that:

  • “Lenders may become concerned about the financial solvency of the government and …  

  • Demand higher interest rates to compensate for the increasing riskiness of holding government debt.” Plus …  

  • “Both foreign and domestic lenders may not provide enough funds for the government to meet its obligations.”

The magnitude of the problem cannot be underestimated. The CBO declares on page 15 that:

  • “The systematic widening of budget shortfalls projected under CBO’s long-term scenarios has never been observed in U.S. history” and …  

  • It will also be larger than the debt accumulations of any other industrialized nation in the post-World War II period, including Belgium and Italy, the two worst cases of all.

But the CBO admits that even these frightening projections may be grossly understated because:

  • “The analysis omitted the pressures that a rising ratio of debt to GDP would have on real interest rates and economic growth.”  

  • “The growth of debt would lead to a vicious cycle in which the government had to issue ever-larger amounts of debt in order to pay ever-higher interest charges.”  

  • “More government borrowing would drain the nation’s pool of savings, reducing investment” and …  

  • “Capital would probably flee the United States, further reducing investment.”

But none of these are factored into the analysis. On page 17 of its report, the CBO writes …

“The analysis … does not incorporate the financial markets’ reactions to a fiscal crisis and the actions that the government would adopt to resolve such a crisis. Because [our] textbook growth model is not forward-looking, the analysis assumes that people will not anticipate the sustainability issues facing the federal budget; as a result, the model predicts only a gradual change in the economy as federal debt rises.

“In actuality, the economic effects of rapidly growing debt would probably be much more disorderly as investors’ confidence in the nation’s fiscal solvency began to erode. If foreign investors anticipated an economic crisis, they might significantly reduce their purchases of U.S. securities, causing the exchange value of the dollar to plunge, interest rates to climb, and consumer prices to shoot up.(Bolding is mine.)

Report #2
U.S. Federal Reserve:
Flow of Funds Accounts
of the United States

Flow of Funds

The Fed’s data on page 12 tells it all: The impact on the U.S. credit markets is not just a future scenario. It’s happening right now.

Yes, the government is getting its money to finance its exploding deficits (for now). But it’s hogging all the available supplies, while American businesses and average consumers are getting shut out or even shoved out.

Specifically …

  • In the first half of last year, the U.S. Treasury raised funds at the annual pace of $411 billion in the first quarter and $310 billion in the second quarter.  

  • But if you think that was a lot, consider this: THIS year, the Treasury has stepped up its pace of borrowing to annual rates of $1.443 TRILLION in the first quarter and $1.896 TRILLION in the second quarter. That’s 3.5 times and over SIX TIMES MORE than last year’s, respectively.

Meanwhile, the private sector is getting killed …

  • Last year, banks provided new credit at the annual pace of $472.4 billion in the first quarter and $86.7 billion in the second. This year, they’re not providing ANY new credit — they’re actually LIQUIDATING loans at the rate of $857.2 billion in the first quarter and $931.3 billion in the second. So if you’re running a business, you may want to think twice before asking your bank for more money. Instead, they may decide to TAKE BACK the money they’ve already loaned you!  

  • Ditto for mortgages. Last year, mortgages were being created at the annual clip of $522.5 billion and $124 billion in the first and second quarters, respectively. This year, on a net basis, mortgages haven’t been created at all. Quite the contrary, the Fed reports that, on a net basis, they’ve been liquidated at an annual pace of $39.3 billion in the first quarter and $239.5 billion in the second.  

  • Getting cash out of credit cards and other consumer credit is even tougher. Last year, folks were able to add to their consumer credit at annual rates of $115 billion and $105 billion in the first two quarters. This year, in contrast, they’ve been forced to CUT back on their credit at annual rates of $95.3 billion in the first quarter … and at an even faster pace in the second quarter — $166.8 billion.

Never before in my lifetime have I witnessed a more severe case of crowding out in the credit markets!

And never before has the CBO been so right in its forecasts of fiscal doomsday: One of its dire forecasts was already coming true even before it issued its report.

Report #3
U.S. Treasury Department:
Treasury Bulletin

Treasury Bulletin

Each and every month, the Treasury reminds us of the single fact that no one in the Treasury wants to face:

The U.S. is deep in debt to the rest of the world, and on page 48, it provides the evidence: total liabilities to foreigners of $7,898,435 million (nearly $7.9 trillion)!

This isn’t a new record. It was actually slightly more last year. But the fact is NOTHING has been done to reduce our debt to foreigners. Quite the contrary, it is the deliberate policy of our government to pile up more — to sell foreign investors and central banks on the idea that they must continue to lend us money.

The fact that this could potentially put our nation into deeper jeopardy is overlooked. And the dire forecast by the CBO that foreign investors might pull the plug is pooh-poohed.

Stay alert to our emails for specific instructions on how to harness these potentially overwhelming forces and harvest them for profits.

Good luck and God bless!

Martin

P.S. If you want to see exactly where I get my quotes and data, just click on the page numbers cited above, and you’ll see the relevant pages I’ve extracted from the government reports with the critical information highlighted in yellow.

Advertisements

Is the U.S. Economy Headed for a “Sudden Stop” Event?

From Cryptogon:

October 2nd, 2009

Must read.

(Full text below.)

Via: Reuters:

October 2nd, 2009

Why gold if deflation is the threat?

Posted by: Rolfe Winkler

Alice Schroeder wrote a great column for Bloomberg yesterday that I’m just getting to. The best stuff comes at the end, where she describes why some people are buying gold even though inflation doesn’t seem to be a big risk. (Apologies in advance for block-quoting lots of stuff in this post, but I think it’s worth it…)

[Gold bugs] aren’t just betting on inflation, as is the conventional wisdom. Gold has a wicked history of being an unreliable inflation hedge. It has, though, at times been a haven against sudden currency depreciation.

In all the talk of inflation because the Treasury is printing so much money versus deflation because it may not print enough, there is one type of inflation that is rarely discussed. This is the mega-inflation caused by a sudden currency devaluation. Currency is like any financial innovation, an obligation secured by assets. When the obligation is perceived to have increased far beyond the level justifiable by the assets, which in this case make up a country’s economy, a bubble has formed.

Schroeder is describing, in much simpler terms, what economist William Buiter has called a “sudden stop” event. (I’m having trouble logging on to FT to find the right link, but the guys at Baseline Scenario have a good one here.) Let’s take a quick detour to Buiter then, writing early this year:

But as the recession deepens, and as discretionary fiscal measures in the US produce 12% to 14% of GDP general government financial deficits – figures associated historically not even with most emerging markets, but just with the basket cases among them, and with banana republics – I expect that US sovereign bond yields will begin to reflect expected inflation premia (if the markets believe that the Fed will be forced to inflate the sovereign’s way out of an unsustainable debt burden) or default risk premia….

The US is helped by the absence of ‘original sin’ – its ability to borrow abroad in securities denominated in its own currency – and the closely related status of the US dollar as the world’s leading reserve currency.  But this elastic cannot be stretched indefinitely….

The only element of a classical emerging market crisis that is missing from the US and UK experiences since August 2007 is the ’sudden stop’ – the cessation of capital inflows to both the private and public sectors. . . . But that should not be taken for granted, even for the US with its extra protection layer from the status of the US dollar as the world’s leading reserve currency.  A large fiscal stimulus from a government without fiscal credibility could be the trigger for a ’sudden stop’.

Most economists, using their conventional models, are looking at things like “output gaps” to rationalize additional borrowing to stimulate the economy. So long as people and capital are unemployed, cost-push inflation isn’t seen as a threat so stimulus is believed to be cost-free. The risk, of course, is that we can’t borrow to infinity. At a certain point — tough to say when — we’ll tap out the national credit line. Where economists get in trouble, IMHO, is they envision this nebulous period in the “medium term” when the economy will be growing again and debt can be paid back. As I argued in my column yesterday, this ignores the fact that growth, which is to say growth in spending, is no longer possible without incremental borrowing. We’ve gotten ourselves into a cycle of perpetual borrowing to, in Schroeder’s words, “pump the economy back to a high-water mark that was phony to begin with.”

To Schroeder’s conclusion:

As in any bubble, those who recognize this need to act well in advance. Historically, governments have taken action to prevent currency flight when the owners of a severely overvalued medium of exchange start selling so much that it adds to the pressure on its price. They make private purchases of gold illegal, or tax the exchange of currency.

Right now, the American economy is worth less than the value implied by the market value of its obligations. How much less, no one knows. But gold bugs will tell you, privately, that this is why they are buyers. Might as well stock up, they say, before gold becomes a controlled substance.

The bolded section is why I haven’t touched stocks in two years and don’t plan to for some time: The U.S. economy is underwater. The value of our obligations is greater than the value of our assets, which is to say the equity value of the economy is negative. The best proxy for that is the stock market.

Stocks aren’t going to zero. They have option value. But a 90% fall from the peak is what I see happening eventually. Over what time frame, I haven’t a clue.

But that’s what happened during the Depression. Today we’re far more leveraged

Companies in Danger of Bankruptcy: Report

The following should not be considered to be investment advice! Do with it what you will, but don’t blame me for any loses you might incur. That being said, if I personally had any stock in any of the following companies, I would look into this a lot more closely and try to make an informed decision.

From TheStreet.com:

NEW YORK (TheStreet) –Audit Integrity, an independent financial research and risk modeling firm, recently completed a study in which it identified the companies with the highest probability of declaring bankruptcy over the next 12 months. The chart follows below.

Top Companies In Danger of Bankruptcy
Companies Bankruptcy Probability (%)
Rite Aid 10.54
Sirius XM Radio 9.04
AMR Corporation 8.74
Federal-Mogul Corporation 8.64
Textron 7.09
Goodyear Tire & Rubber 6.85
Continental Airlines 6.59
CBS Corporation 6.22
Las Vegas Sands 5.91
Liberty Media 5.55
Advanced Micro Devices 4.81
Macy’s 4.65
Mylan 4.46
Apartment Investment Management 4.04
Hertz Global Holdings 3.99
Redwood Trust 3.96
Oshkosh 3.84
Amkor Technology 3.47
Interpublic Group 3.35
Sprint Nextel 3.27

Federal Reserve rejects request for public review

This should come as no surprise.

From Raw Story:

The institution which creates and oversees America’s currency wants to keep a “low profile,” according to a published report on Monday, and may willing to dodge the U.S. Treasury in order to do so.

According to Bloomberg News, the Federal Reserve Bank will not submit to a voluntary public study of its internal structure and methods of governance, as it was requested to do so by Treasury Secretary Timothy Geithner.

Geithner is the former New York Federal Reserve Bank chairman. The review he requested is part of President Barack Obama’s financial regulatory reforms, which he proposed in mid-June. Part of those reforms would have studied the Fed’s “ability to accomplish its existing and proposed functions” — a proposal the bank’s board of governors appears to have flatly rejected.

“The agency also said that while the report requested by Secretary Geithner and his department has not yet been scrapped, no work has been done on the project, which is due Oct 1,” noted Reuters.

“The institution is trying to keep a low profile,” Vincent Reinhart, a former Fed monetary policy director, told Bloomberg. “To publish a report now invites comment on that report.”

And comments are the last thing the Fed wants right now.

Under fire

The Federal Reserve has been under growing political fire ever since Congressman Ron Paul (R-TX) made it a frequent target during his presidential campaign. However, Paul has been a longtime opponent of the bank, openly calling for it to be abolished and the U.S. dollar to once again be backed by gold, instead of mere faith.

“From the Great Depression, to the stagflation of the seventies, to the burst of the dotcom bubble last year, every economic downturn suffered by the country over the last 80 years can be traced to Federal Reserve policy,” Paul said in 2002, according to congressional records. “The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial ‘boom’ followed by a recession or depression when the Fed-created bubble bursts.”

His bill, House Resolution 1207, which would subject the Fed to a complete audit, has gained significant traction in the U.S. House of Representatives, with over half its members signing on in support of the move. Though mostly Republicans, a large cross-section of Democrats reached across the aisle to support the bill, and Rep. Barney Frank (D-MA), who chairs the House Financial Services Committee, recently told a town hall audience that the Fed will be subjected to a complete audit soon. He predicted the House will pass Paul’s bill — or an amalgam of it, wrapped with other regulatory reforms — “probably in October.”

“A companion bill in the Senate introduced by Sen. Bernie Sanders (I-Vt.) has 27 cosponsors,” noted The Hill.

The Fed has also come under fire for refusing to disclose which firms it paid massive bailouts to in 2008 and early 2009, amid the greatest financial crisis since the Great Depression. A particular amount of interest among lawmakers has focused on the Bank of American – Merrill Lynch & Co. merger, which the Fed facilitated.

The House Domestic Policy Subcommittee, under the leadership of Congressman Dennis Kucinich (D-OH), subpoenaed the Fed in June for records relating to the transaction. New York Attorney-General Andrew Cuomo has claimed that, in 2008, then-Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke strong-armed BofA into buying Merrill — a move that, if true, could expose Paulson and Bernanke to prosecution. That investigation is under way.

Fed Chairman Ben Bernanke “has vehemently opposed the idea [of an audit], asserting that it would lead to the politicization of monetary policy by giving Congress an easy way to second-guess any decision the Fed makes,” noted The Los Angeles Times in late August.

That specific argument — that the monetary system is endangered by closer observation of Fed actions — was discounted by Judge Loretta Preska of the Manhattan U.S. District Court, in a ruling that ordered the Fed to disclose which firms received bailout dollars.

While the Fed argued that disclosing who was bailed out on the taxpayer’s dime could be detrimental to the agency’s independence from Congress, Judge Preska wrote that the claim was based merely on “conjecture” and the court remained unconvinced because the Fed had failed to provide adequate evidence to substantiate its claims.

“[The] risk of looking weak to competitors and shareholders is an inherent risk of market participation; information tending to increase that risk does not make the information privileged or confidential,” she wrote.

— Stephen C. Webster

“Option” mortgages to explode, officials warn

From Reuters:

By Lisa Lambert

WASHINGTON (Reuters) – The federal government and states are girding themselves for the next foreclosure crisis in the country’s housing downturn: payment option adjustable rate mortgages that are beginning to reset.

“Payment option ARMs are about to explode,” Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama‘s administration to discuss ways to combat mortgage scams.

“That’s the next round of potential foreclosures in our country,” he said.

Option-ARMs are now considered among the riskiest offered during the recent housing boom and have left many borrowers owing more than their homes are worth. These “underwater” mortgages have been a driving force behind rising defaults and mounting foreclosures.

In Arizona, 128,000 of those mortgages will reset over the the next year and many have started to adjust this month, the state’s attorney general, Terry Goddard, told Reuters after the meeting.

“It’s the other shoe,” he said. “I can’t say it’s waiting to drop. It’s dropping now.”

The mortgages differ from other ARMs by offering an option to pay only the interest each month or a low minimum payment that leads to a rising balance in the loan’s principal.

When the balance of the loan reaches a certain level or the mortgage hits a specific date, the borrower must begin making full payments to cover the new amount. The loan’s interest rate also may have been fixed at a low level for the first few years with a so-called teaser rate, but then reset to a higher level.

Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, they “threaten a much greater hit to the consumer than the subprimes,” Goddard said, referring to the mortgages often extended to less credit-worthy borrowers that fed the first wave of the financial crisis.

Miller said option-ARMs were discussed at Tuesday’s meeting on mortgage scams, which brought state attorneys general from across the country together with U.S. Treasury Secretary Timothy Geithner, Attorney General Eric Holder, Housing and Urban Development Secretary Shaun Donovan, and Federal Trade Commission Chairman Jon Leibowitz.

The mortgages tend to be “jumbo,” or for significantly large amounts, Goddard said, making it even harder for borrowers to sidestep foreclosure. He said he expected to see an increase in scams as distressed homeowners become more desperate to refinance big debts.

Goddard said his office is investigating hundreds of cases where companies have made fraudulent promises, and charged large fees, to mortgage defaulters.

The U.S. housing market has suffered the worst downturn since the Great Depression, and its impact has rippled through the recession-hit economy.

Some signs of stabilization emerged recently, with sales rising and home price declines moderating in many regions of the country. Home prices in some regions have risen.

However, many economists say there is still a huge supply of unsold homes lingering on the market and that, coupled with a frenzy of more foreclosures ahead, should depress home prices for the rest of 2009.

Real estate data firm RealtyTrac, in its August 2009 U.S. Foreclosure Market Report, said foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 358,471 U.S. properties during the month, a decrease of less than 1 percent from the previous month, but an increase of nearly 18 percent from the same month a year ago.

The report said one in every 357 U.S. housing units received a foreclosure filing last month.

Go for Gold: Inflation Is Here and Going to Get “Much, Much Worse,” Pento Says

WARNING: This is not a recommendation to buy, sell or hold any financial instrument.

From Yahoo! finance:

  • Bernanke says recession ‘very likely over’ – AP
  • Fed Chief Says Recession Is ‘Very Likely Over’ – NYT.com
  • Bernanke Sees Recession’s End – WSJ.com

As is so often the case, Tuesday afternoon’s headlines missed the nuance of the story. Ben Bernanke’s full statement told a much less ebullient tale: “From a technical perspective, the recession is very likely over at this point,” he said. “It’s still going to feel like a very weak economy for some time because many people will still find that their job security and their employment status is not what they wish it was.”

Michael Pento, chief economist at Delta Global Advisors, has a more fundamental critique of the coverage: “Why would anybody listen to this guy in the first place?,” Pento wonders. “[Bernanke] told us the recession wasn’t even going to occur. He was very slow to reduce interest rates and now very very slow to raise them. So I wouldn’t put any credence in anything he does, at all.”

Pento’s primary concern is that the Fed’s easy money policies are going to lead to further weakness in the dollar, which is down 14% since March vs. a basket of other currencies. Pento believes we’re facing a major inflation threat – and much sooner than most people expect.

On Tuesday, the government said PPI rose a much stronger-than-expected 1.7% in August. Come December, the price of oil will be up 100% from a year ago, Pento notes; given energy’s major weighting, that will have huge ramifications for PPI and CPI data going forward. (Wednesday morning brought a higher-than-expected report on CPI. Both CPI and PPI remain negative on a year-over-year basis but the declines are narrowing and both are trending higher: for example, CPI is up 4.9% on a 3-month annualized basis, according to Miller Tabak.)

“Everybody knows inflation is here and is going to grow much, much worse,” Pento says.

As a result, Pento remains bullish on gold and recommends clients invest in bullion, gold ETFs and miners like Eldorado Gold.

Financial News: Europe Overtakes US as Wealthiest Region

Obviously the plan to turn us into a Third World nation is working.

From Speigel:

A new report on global wealth says that Europe has overtaken the United States to become the richest region in the world. But the Americans still have more millionaires then the EU — and should you want to marry one, you might be better off in Singapore or the Middle East.

From dishwasher to millionaire. If that’s the sort of career you want, then there’s no place like the USA. It is the land of unlimited opportunity. But over the last 12 months many Americans have also come to learn about opportunities that lead in the opposite direction: from millionaire to dishwasher, for instance.

//

The worst global recession in decades has left its mark on the world’s economic powers, but no nation has been affected quite as badly as the US, wealth dropped by 22 percent — almost double the worldwide average. The “Global Wealth Report” released by the Boston Consulting Group (BCG) on the anniversary of the Lehman Brother’s bank collapse indicates that Europe has overtaken North America to become the world’s wealthiest region.

America Poorer, Europe Richer

BCG’s Global Wealth report looks at the value of assets held by the asset management industry. According to these figures the world’s wealth dropped almost 12 percent, going from $104.7 trillion in 2007 to $92.4 trillion in 2008. This is the first worldwide contraction in these kinds of assets in nearly 10 years, the study said. And while North America — which includes both the US and Canada — had $29.3 trillion, Europe had around $32.7 trillion in assets under management. So it would appear that the Europeans have been rewarded for their traditional caution in this crisis. Despite Europe’s strong position, the United States still remains the world’s wealthiest country, with $27.1 in assets under management.

The drop in wealth isn’t entirely a result of the financial crisis — money has been shifting around for other reasons too. As BCG says in a statement accompanying the report, “stung by losses and scandals, clients shifted their assets to basic, low-margin investments.”

“A lot of investors withdrew money, some to settle debts and some to shift money into assets deemed less risky — such as real estate or gold,” Ludger Kübel-Sorger, director of BCG in Frankfurt, said.

Worldwide Fewer Millionaires

The number of millionaires around the world also decreased. In 2007 there were 11 million, but in 2008, the world could only produce 9 million, a drop of 17.8 percent. Both Europe and North America lost 22 percent of their millionaires, although the US can still claim to have the most of any country with 3.9 million millionaires. But this is only 3.5 percent of the American population. Other countries have more millionaires per capita, with 8.5 percent of Singapore’s population making it as millionaires, Switzerland boasting 6.6 percent, Kuwait 5.1 percent and the United Arab Emirates 4.5 percent.

And another point for discussion arises out of this report too — the more money you had before the financial crisis, the more risks you were taking, making any investments at all. Which is why you have come out of this crisis looking poorer. If you had no savings and no investments, you may have lost in other ways that this BCG survey does not take into account. And this is why the financial crisis appears to have hit the financial elite harder — that is, those defined by the study as having liquid assets of $5 million dollars or more. They simply had more to lose.

Latin America was the only region where wealth increased. There assets under management grew by 3 percent in 2008. According to the BCG report, wealth levels are expected to rise again but not until 2013. Although, they say, levels may rise faster in the Asia Pacific region, in centers like Singapore and Hong Kong, where BCG expects better than average growth in the coming years.