Tag: economics

Crackpot credentials

VDH considers the other European volcano.

Few wanted to listen when it was pointed out — well before the Greek meltdown — that on key questions of demography and immigration, the future of the European Union was bleak. The very idea that, in historical terms, socialism, agnosticism, pacifism, and hedonism were not only interrelated and synergistic, but also suicidal for civilization, was considered crackpot.

I seem to recall a certain cowardly atheist who thought I belonged in the category. I didn’t mind that characterization in the least because the reality is that most intelligent and independent thinkers are considered crackpots and lunatics by the unthinking masses, right up until the moment that they are proven correct.* And, of course, at that point, everyone who previously dismissed them immediately begins to pretend that what they had once characterized as “crackpot” was never anything out of the mainstream.

Today, the smarter progressives and equalitarians find themselves in a state of intellectual shock. The foundations of the erroneous beliefs for which they have so confidently thrown away centuries of history and tradition are crumbling before their eyes and they have literally nothing upon which they can fall back. The less intelligent ones, of course, have no idea that anything out of the ordinary has been happening in the diverse areas of economics, genetic science, and government pensions and so they continue to blithely advocate their empty progressive, equalitarian, big government ideas even as a world that has been built upon them teeters on the verge of complete collapse.

This most certainly does not mean that a freer, more traditional, more capitalistic world is in the making. The opposite is more likely true, at least in the intermediate term. But the truths of these matters will be known and the seeds of future freedom find fertile soil in which to grow.

* A relevant quote from Mises happened to pop up today: “Education rears disciples, imitators, and routinists, not pioneers of new ideas and creative geniuses. . . . The mark of the creative mind is that it defies a part of what it has learned or, at least, adds something new to it.”

As predicted

The mainstream media has gradually moved from discussing a jobless recovery to the “Great Recession” and is now beginning to contemplate a Great Depression 2.0.  Robert Samuelson is among the first:

It is now conventional wisdom that the world has avoided a second Great Depression. Governments and the economists who advise them learned the lessons of the 1930s. When the gravity of the financial crisis became apparent in late 2008, the response was swift and aggressive. Central banks like the Federal Reserve and the European Central Bank dropped interest rates and lent liberally to threatened financial institutions and rattled investors. The United States and many countries approved “stimulus” programs of tax cuts and additional spending. Panic was halted. A downward spiral of falling private spending and rising unemployment was reversed. The resulting economic slump was awful. But it was not another Great Depression. The worst has passed.

Or has it? Greece’s plight challenges this optimistic interpretation. It implies that celebration is premature and that the economic crisis has moved into a new phase: one dominated by the huge debt burdens of governments in advanced societies. Comparisons with the Great Depression remain relevant — and unsettling. Now, as then, we may be prisoners of deep and poorly understood changes to the world economic system.

As I explained in the book, the problem is debt combined with the fact that neither Keynesian nor Monetarist economics place much significance on it.  Even now, you will find some stubborn neo-Keynesians insisting that debt is good, that it cannot possibly be the root of the problem.  As Karl Denninger has repeatedly shown, their attempts to explain the situation demonstrate little more than their ignorance of simple mathematics as well as political economy.

The massive sovereign debts can never be repaid.  Nor can many of the private and corporate debts.  So, once the burden of servicing them becomes too great, they must be eliminated with either default or hyperinflation.  The frantic efforts of the various Western governments to shovel nearly $1 trillion into the maws of the desperate bankers is little more than an attempt to buy a little more time in the futile hope that the magical revival of Keynesian animal spirits will trump the inexorable mathematics.

So bankrupt indeed

Perhaps Helicopter Ben needs to tell Fannie Mae to relax and enjoy the grass shoots and GDP growth:

“When Treasury provides the requested funds, the aggregate liquidation preference on the senior preferred stock will be $84.6 billion, which will require an annualized dividend of approximately $8.5 billion. This amount exceeds our reported annual net income for each of the last eight fiscal years, in most cases by a significant margin.”

This, in English, means “We do not earn enough in a quarter to pay the dividend – that is, the interest on the borrowed money.”

So it’s not just homeowners who can’t pay their mortgages anymore. By the way, I don’t mean to worry anyone unduly, but I seem to recall that FNMA was the last big investment made by Ben Bernanke prior to this weekend’s Euro stabilization gambit. I’m beginning to think we’d be better off turning the Federal Reserve over to Goldman Sachs. After all, their traders didn’t lose money on a single business day during the first quarter. They must be really good!

Contagion

It looks like Portugal is coming to the plate, with Spain on deck:

Portugal
2-Year: 797 basis point spread over US Treasury
5-Year: 427
10-Year: 363

Spain
2-Year: 260
5-Year: 187
10-Year: 118

By way of comparison, the UK/US spread is 29.2 on the 2yr. The Greek/US spread is around 1840.

The nonexistent recovery

RGD readers will know that I’m very skeptical of the reliability of government economic statistics, mostly because they are a constantly moving target that mutate over time. However, a closer look at everything from TOTLL to today’s GDP Advance (3.2% annual) makes it appear as if the statistical shenanigans are growing exponentially:

I’m concerned with these numbers – quite concerned in fact. The Federal Government borrowed (and presumably spent) $462 billion in excess of tax receipts over the first three months of 2010. But PCE – personal consumption expenditures – was up $83 billion and federal spending was up only 3.5 billion.

Where did the other $375 billion go?

Into a black hole of covering existing obligations, it appears, and the final private demand GDP deficit covered by this is almost exactly 10% (GDP for the quarter is ~3.650 trillion, so $375 billion is roughly 10% of that.)

Karl Denninger isn’t the only one to notice anomalies with regards to today’s BEA release. Calculated Risk notices that Residential Investment isn’t behaving in its usual post-recessionary manner: “RI as a percent of GDP is at a new record low. And there is no reason to expect a sustained increase in RI until the excess housing inventory is absorbed. Notice that RI usually recovers very quickly coming out of a recession. This time RI is moving sideways – not a good sign for a robust recovery in 2010.”

And now Spain

First Greece. Then Portugal. Now Spain. It shouldn’t be long before Ireland’s credit rating appears in the news, as per RGD.

Spain’s credit rating was cut to AA from AA+ by Standard & Poor’s Ratings Services. The outlook is negative, S&P said.

It’s going to go lower than AA….

Here we go again

Another much-ballyhooed bazooka fails:

“We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day. “The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.”

Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds. This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities.

And here is a perfect example of the inherent danger – and stupidity – in centralizing any form of power. In the pre-Euro days, Greece could have devalued the drakhma and relieved the pressure on its bond market. The effects would have been negative, but limited solely to Greece. Now, thanks to the centralized structure of the EU, the bail-out expense threatens the pocketbooks of Germans and the debt contagion threatens Portuguese, Italian, Spanish, and Irish bonds.

The worst thing is that the proposed “emergency” solution involves further centralization, which involves kicking the problem down the road for a while. This means that when the debt issue resurfaces, it will threaten the ECB directly. The ECB would be wise to do what the Fed did not have the courage to do and let Greece default. Unfortunately, wisdom and central bankers appear to be mutually exclusive concepts these days.

I am amused by the continued expansion of the financial analogies, though. First the Fed had a “gun”, then the EU had a “bazooka”. Now the ECB has a “nuclear option”. But, like previous analogical armaments that were brandished so futilely, it can only be perceived as effective so long as it isn’t used. It’s an empty bluff, just like all the previous ones.

Here’s a few more details on the latest in the ongoing Euromeltodown:

ATHENS — Greece was pushed to the brink of a financial abyss and started dragging another eurozone country – Portugal – down with it Tuesday, fueling fears of a continent-wide debt meltdown. Stocks around the world tanked when ratings agency Standard & Poor’s downgraded Greek bonds to junk status and downgraded Portugese bonds two notches, showing investors that Greece’s financial contagion is spreading. Major European exchanges fell more than 2.5 percent, and on Wall Street, the Dow Jones industrial average finished down more than 200 points. The euro slid more than 1 percent to nearly an eight-month low.

“We have the makings of a market crisis here,” said Neil Mackinnon, global macro strategist at VTB Capital.

Greece is struggling with massive debt, and with prospects for economic growth weak it could end up in default. Its 15 eurozone partners and the International Monetary Fund have tried to calm the markets with a euro45 billion rescue package, but it hasn’t worked.

Standard & Poor’s warned that holders of Greek debt could take large losses in any restructuring, but a greater worry is that Greece’s debt crisis is mushrooming to other debt-laden members of the eurozone.

One bailout can be dealt with but two will be stretching it, and there are fears that other weak economies could be pulled down in the Greek spiral – including Europe’s fifth-largest, Spain. Can Germany, Europe’s effective paymaster, continue to bail out the weaker members of the eurozone?

The crisis threatens to undermine the euro and make it harder and more expensive for all eurozone governments to borrow money.

It has also disrupted cooperation between eurozone governments, with Germany resisting the idea of bailing out Greece unless strict conditions are met. Many investors think Greece will have enough money to avoid default in the coming weeks, but the future is cloudier. Both Standard & Poor’s and the Greek finance ministry insisted that the country will have enough money to make the euro8.5 billion bond payments due on May 19.

Beware the post-Ides of May….

Greece junked

Another Black Swan spotting!

Greece’s credit rating was cut three steps to junk by Standard and Poor’s, the first time a euro member has lost its investment grade since the currency’s 1999 debut. The euro weakened and stock markets throughout the region plunged.

Greece was lowered to BB+ from BBB+ by S&P, which also warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt. The move, which puts Greek debt on a par with bonds issued by Azerbaijan and Egypt, came minutes after the rating company reduced Portugal by two steps to A- from A+.

Wait a minute, hasn’t the financial media reported that Greece was saved, bailed out, etc about 20 times in the last month? Anyhow, you may recall that I suggested going long dollar a few months ago, back when the Euro was around $1.45. Needless to say, the few people who noticed at the time said I was crazy. Again.

On a tangential note, don’t you enjoy the way the ratings services always helpfully let you know that a bond is worthless well after it becomes completely freaking obvious? I don’t often agree with Paul Krugman, but I thought it was impressive that 93% of the AAA-rated mortgage securities are now downgraded to junk. Ex post facto, of course. It would appear that an AAA rating doesn’t mean what so many investors thought it meant.

The calm before the storm

In response to Dr. Helen’s question, the answer is an unequivocal “yes”.

Glenn just got Vox Day’s new book in the mail, The Return of the Great Depression, so I picked it up and started reading. It is not for the faint of heart or the economically hopeful…. I have noticed that house sales (at least in the lower prices) in our area seem to be picking up and people seem to be out buying again–or at least, they are in the stores. I wonder if this is just the calm before the storm or whether things are improving?

This graph on debt outstanding by sector should explain why things look superficially as if they are improving, while they are actually doing absolutely nothing of the kind. Keep in mind that Q2 2010 – in other words, now – marks the beginning of the end of the massive federal stimulus plan that has allowed the substitution of G for C over the last six quarters. But as the first graph shows, that substitution cannot continue indefinitely. It would require deficits that are multiples of Obama’s record-setting 2009 and 2010 deficits and it wouldn’t ultimately work any better than either the Bush or Obama stimuli did.

And this is an amusing aside from Dr. Helen’s husband:

SORRY, WE’RE STILL SCREWED: Reihan Salam says we’re heading into a decade-long economic buzz saw. “We are propping up the most rotten sectors of the economy and diverting talent that would otherwise shift into the new interrelated systems that are slowly emerging—and this emergence will prove very slow indeed once the inevitable tax burden required to prop up aging yet politically powerful sectors hits.” Let’s hope this is wrong, but it’s basically an explanation of why a powerful federal government, unconstrained by traditional limits, is a bad idea. Oh, well, at least I’ve got Vox Day’s book to cheer me up . . . .

The Ark-B economy

Greece exemplifies the inherent unreliability of government economic statistics:

Financially-stricken Greece had an even bigger budget deficit for 2009 than previously thought, official figures showed Thursday — at a time the country is considering whether to tap a bailout facility from its 15 partners in the eurozone and the International Monetary Fund.

The European Union’s statistics office Eurostat said that Greece’s budget deficit in 2009 as a percentage of economic output was 13.6 percent — that’s up from the previous estimate of 12.9 percent and nearly double the 7.7 percent recorded in 2008.

Fictional numbers informing the deployment of fictional money by fraudulent financiers. I have a sneaking suspicion that the people of the far future are going to look back on our time as the Idiot Ages. We are the telephone sanitizers.