The Most Important Economic Chart Of The Year

 A Picture Is Worth A Thousand Words, Analysis & Commentary, Back to the basics, Bond Market, Creditors Caveat, Deflation-Inflation-Stagflation, Devaluation, Economic Analysis Isn't Science, European Union?  No Responses »
Dec 262011
 

courtesy of Spiegel Online:

This chart illustrates the end of euro complacency. Investors once acted as though the euro eliminated not just currency risk but sovereign credit risk. All nations–from Greece to Germany–could borrow at the same low rates. No longer. As the financial crisis enters its fifth year, markets are again distinguishing between strong nations and weak.

I subsequently discovered that I am not alone in choosing this chart. The BBC has a version of this as the first entry in its survey of top graphs of the year (with commentary by Vicky Pryce of FTI Consulting), and Desmond Lachman of the American Enterprise Institute included it in Derek Thompson’s survey of top graphs over at the Atlantic.

P.S. For the United States, I think Brad DeLong is right: behold the shortfall in nominal U.S. GDP.

 

The Most Important Economic Chart Of The Year by Donald Marron

Posted by Brian Schuettler at 10:16 am  

Signs Point to Economy’s Rise, but Experts See a False Dawn

 Analysis & Commentary  1 Response »
Dec 232011
 

“Unfortunately, I think we’re going to see a slowdown over the course of next year,” Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch, told reporters last week. “Not only do we have the European crisis spilling over and hurting U.S. trade and confidence,” he said, but the United States economy also faces “homegrown shocks.”

There are two reasons for the renewed pessimism. First, economists say that temporary trends increased growth in the fourth quarter and may not continue into next year. Second, the economy faces significant headwinds in 2012: some from Europe’s long-lingering sovereign debt crisis, and some from domestic cutbacks beyond the control of President Obama, whose campaign would like to point to a brightening economic picture, not a darkening one. Even the Federal Reserve is predicting that the unemployment rate will remain around 8.6 percent by the time voters go to the polls in November.

The fourth quarter benefited, for instance, from wholesalers restocking inventories of goods like petroleum, paper and cars, giving a jolt to growth.

“We had lean inventories, so those required additional production to satisfy demand,” said Gregory Daco of IHS Global Insight. “But once inventories are restocked, there is no need to restock them anymore. That means there’s going to be less production,” he said.

Consumers also pulled back on their savings, helping to finance a recent spurt in spending. a trend that forecasters doubt will continue. Other short-lived factors include falling gasoline and commodity prices, and an increase in orders from Japanese companies returning to business after the devastating spring tsunami.

But next year, Washington is increasing some taxes and reducing spending as temporary measures enacted during the worst of the recession expire. That will damp growth by a percentage point or more next year, forecasters say. Provisions like a tax write-off to help businesses pay for equipment are winding down or ending.

Signs Point to Economy’s Rise, but Experts See a False Dawn

Posted by Brian Schuettler at 1:15 pm  

The evidence is building that global growth has stalled. And it’s about to get much worse.

 A Changing Europe, A Growing List Of One Term Presidents, A Picture Is Worth A Thousand Words, A State of Distress, A Time To Repent, Analysis & Commentary, Bond Market, Creditors Caveat, Deflation-Inflation-Stagflation, Deleveraging, Derivatives Reform, Dismal Science-Ignorant Scientists?, Economic Analysis Isn't Science, European Union?, Fiat Currency, Figures don't lie but Liars can figure, Financing Terrorism, Former Economist, Goldman: Underwriter or Undertaker?, Having Fun With Derivatives, History of Finance, How do you dampen the inflation dragon?, If I Only Knew It Was This Easy!, IMF Issues - Discussion, Insolvency, Integrity and Responsibility  No Responses »
Dec 042011
 

I think the most notable development this week was Thursday’s big release of global factory activity surveys. It wasn’t pretty. Overall, the JP Morgan Global Manufacturing PMI dropped for the third straight month and fell below the 50 level — the line of demarcation between growth or contraction in monthly factory activity — for the first time since recession was descending upon us back in early 2008. Scary stuff.

 

Although U.S. activity was buoyant (no doubt a remnant of the sentiment tailwinds enjoyed from the market rally in October), we cannot remain an island of tranquility as Asia and Europe fall into the abyss.

 

Here are the highlights (any reading under 50 indicates a drop in activity):

 

*Brazil PMI: 48.7 vs. 46.5 prior
*Ireland PMI: 48.5 vs. 50.1 prior
*Sweden PMI: 47.6 v. 49 estimated
*Norway PMI: 48.6 vs. 50.2 estimated
*Denmark PMI: 47.7 vs. 43.6 prior
*Poland PMI: 49.5 vs. 51.7 prior
*Spain PMI:  42.8 vs. 43.9 prior
*Swiss PMI: 44.8 vs. 46.6 estimated
*Czech PMI: 48.6 vs. 51.7 prior
*Italy PMI: 44 vs. 42.8 estimated
*France PMI: 47.3 vs. 47.6 estimated
*Germany PMI: 47.9
*Greece PMI: 40.9 vs. 40.5 prior
*South Korea PMI: 47.1 vs. 48 prior
*Taiwan PMI: 43.9 vs. 43.7 prior

 

And, now for the big boys:

 

*Eurozone PMI: 46.4 — lowest reading since recession ended in July 2009
*U.K. PMI: 47.6 vs. 47 estimated — lowest since June 2009
*China PMI: 49 vs. 49.8 estimated — lowest reading since February 2009
*China HSBC PMI: 47.7 vs. 51 prior — 32-month low

 

In addition to signs of economic weakness — which was enough for a Chinese vice finance minster to say the global economy faces a “worse situation” than in 2008 — there was evidence that the financial system remains under severe stress despite the freak out over Wednesday’s move by the Federal Reserve to lower dollar funding costs for foreign banks (which, as I discussed at the time, wasn’t really a game changer). The European Central Bank reported that eurozone banks borrowed nearly €9 billion in overnight emergency cash — up from €2.7 billion earlier this week. Not good.

 

Other signs of strain could be seen in the way German 12-month bill yields dropped below zero on Wednesday as European investors were willing to pay Berlin for the luxury of lending it money. The motivation is that, if you’re holding a big wad of euros, German short-term debt is one of the few “sure bets” left out there. It’s a sign of extreme risk aversion and fear.

 

Of course, the epicenter for all this is Europe.

 

Adding to concerns were comments this week from new ECB chief Mario Draghi that while downside risks to the economic outlook have increased, he cannot ride to Europe’s rescue by engaging in unmitigated money printing and bond buying; instead, it must adhere to its founding principles, including an inability to engage in monetary financing of government debts (exactly what the likes of Italy would love right now).

 

Draghi’s comments were akin to yelling “fire” in a crowded theater before announcing all the fire extinguishers are empty. Whoops.

According to the team at Capital Economics, based in London, the eurozone economy is on track to contract by 1% next year and by 2.5% in 2013, with risks to the downside for both forecasts. Recession will only deepen the budget deficits at the center of the eurozone debt crisis. The only way out is growth. And the only way the likes of Greece, Portugal, and Italy can restore growth is via massive currency depreciation and domestic inflation — something that’s not going to happen as long as they’re in the eurozone.

 

Sure, there will be distractions like Wednesday’s move by the Fed or additional stimulus measures out of places like China and Brazil. That’s just how the market gods like it. All the better to keep the masses confused and complacent as the fundamentals just get worse and worse.

 

To put it differently: When you look around the theater, everyone’s still focused on center stage blissfully unaware what’s happening around them. Turn around. The balcony level is in flames.

The Economy Is About To Get A Lot Worse – Anthony Mirhaydari, MSNBC

 

Posted by Brian Schuettler at 9:57 am  

A Future Prediction

 Analysis & Commentary  No Responses »
Nov 272011
 

The governments, regulators and bullion banks have let the silver market get more and more leveraged. We’ve seen a lot of wealth destruction as a result of this leverage and we’re going to see a lot more until, finally, the governments decide to change the system
I don’t buy the argument on margin hikes at all.

It’s not up to them to decide what is parabolic. They’re not investors themselves. They don’t have money in the market. They decide a bubble is going to happen if they don’t raise margins but no one knows when a bubble is forming. It is only apparent after it’s already happened. By hiking the margins, they create the appearance of a bubble bursting. They create the bubble. They create the proof that it was a bubble. If they let it alone, the market would stabilize by itself

The job of the regulators is to protect the retail investor. That’s their only job. It’s not to protect the banks or the brokerage firms. The little guy is the primary taxpayer. Why were the Securities and Exchange Commission (SEC) and the CFTC put in place? They were put in place to protect retail investors. Prior to regulation, the banks controlled the market. Today, the banks control the market again. Who should control the market? Retail investors. Who’s protecting them? No one.
Are you saying that the CFTC does nothing while the COMEX caters to banks and brokerage firms?
Yes.

And the COMEX doesn’t serve retail investors?

No. Absolutely not.

Do you foresee a return to a free market in the future?

I’m an optimist. I believe one day that governments will rewrite the rules and force the regulators to protect investors. That’s where we were back in the ‘70s and that’s where I think we have to be again to correct the problems that have arisen over the past 40 years. Silver is being revalued. It’s going to affect a lot of people along the way and it will change the financial system. Ultimately, we’re going to have a new financial system and, hopefully, we’ll go back to natural markets, completely driven by supply and demand. It may take another 20 years but I think it will happen.

A new financial system?

If I’m wrong, the banks will run the world, even more so than they do today, 10 or 20 years from now. God forbid that we ever get there because that’s a one currency, one government world that would absolutely be a disaster for the human race. There would be no freedoms at all to move or to invest. It would be like having shackles on our ankles. There is a movement to go in that direction, unfortunately. There are a number of very wealthy people that want to see that. I hope that we can find the politicians to prevent that type of world from coming to pass.

Keith Neumeyer

Chief Executive Officer, President and Director of First Majestic Silver Corp. (AG). Mr. Neumeyer began his career at the Vancouver Stock Exchange and worked in the investment community for 26 years beginning his career in a series of Canadian national brokerage firms including McLeod Young Weir (now Scotia McLeod), then Richardson Greenshields and then Walwyn Stogell McCuthchen (which became Midland Walwyn).

Mr. Neumeyer moved on to work with several publically traded companies in the natural resource and high technology sectors. His roles have included senior management positions and directorships in the areas of finance, business development, strategic planning and corporate restructuring. Mr. Neumeyer, who has listed a number of companies on the Toronto Stock Exchange, has extensive experience dealing with financial, regulatory, legal and accounting issues.


Posted by Brian Schuettler at 9:06 am  

Time To Move To Cash?

 Analysis & Commentary, Back to the basics, Cash Is King!  No Responses »
Nov 272011
 

Is it time to exit the stock market and move to cash?

What looks like the most logical move for stock investors may not end up being the best move. We have a situation in Europe that is teetering on the brink of full-blown crisis that would likely result in a global financial contagion. Such an outcome would be decisively negative for stocks. Thus, moving fully from stocks to cash might almost appear like a no brainer.

But making such a decisive move amplifies a particular element of risk in your portfolio. It is policy risk. And it is measured by the actions or lack thereof by global fiscal and monetary policy makers in addressing the various crises that arise along the way. Just as the lack of any policy action is a downside risk, the execution of aggressive policy action is a profound upside risk for stocks. Therefore, while waiting for policy action that never comes can be perilous, it can be equally crushing to exit the stock market just as unexpectedly aggressive policy action sends the stock market soaring.

The primary challenge in managing policy risk is that it is difficult to measure. This is due to the fact that it is highly dependent on the whims of human behavior and decision-making. On what day, if ever, does German Chancellor Angela Merkel suddenly decide that Eurobonds may actually be a good idea? At what hour, if at all, does the European Central Bank opt to announce that they will engage in quantitative easing through the large scale asset purchases of the bonds of at risk sovereigns across the eurozone? And at what moment, and to what scale, does U.S. Fed Chairman Ben Bernanke decide to begin pulling the trigger on QE3? While investors can spend their days reading various tea leaves, there’s no telling exactly when during times of crisis that policy makers may finally be compelled to act if at all. This leaves stock investors on a constant tight rope since the two outcomes associated with policy action and policy inaction are so widely divergent. Stay in the stock market that receives no policy support and suffer further declines, or exit the stock market that suddenly receives policy support and miss a dramatic rally. Frustrated stock investors have to look no further than the afternoon of October 4 to see how swiftly the market can shift, seemingly without any reason whatsoever other than the policy response – Operation Twist in this case – that often only becomes apparent in retrospect.

So what is an investor to do? All signs out of Europe indicate that it’s time to get out of stocks and get to the sidelines. But we could wake up on any given day and the stock market is suddenly soaring behind some extraordinary (or perceived to be extraordinary) policy response from the ECB, eurozone leaders and/or the Fed. So what is the answer? It’s not necessarily about choosing between stocks or cash. Instead, it’s about hedging your stock positions with allocations that include cash.

It should not be a question of stocks OR cash in the current environment. Instead, the answer is stocks AND cash along with a variety of other complementary positions that are designed to withstand crisis and have the potential to perform when stocks are under extreme pressure. This way, stock investors can more effectively manage against policy risk so that they can participate if stocks suddenly rise due to aggressive policy action but are also protected if stocks continue to fall.

Time To Move To Cash? by Eric Parnell

Posted by Brian Schuettler at 8:27 am  

The idea of war for and on another planet

 A Moral Question - Not A Political One, A Shareholder-Not Just a "Stakeholder", Analysis & Commentary  No Responses »
Nov 062011
 

Meanwhile, the Chinese, twenty years ago, set up a plan for space which they are steadily achieving.  They have hit every target so far, Paul Murdin said, though not precisely on time.  Their next big goal is to colonise the Moon and he’s quite sure that they will.  This scares the USA, he says, because it is still interested in global competition, even though it is not feeding its own space programme at the moment.  But space programmes can be recreated, as Kennedy did when he created NASA to put men on the Moon.

There is a tendency to compare the Moon with the Antarctic and say that it will belong to everybody and nobody.  This was dismissed by those around the table.  Paul Murdin didn’t even think it would really apply to the Antarctic much longer.  He’d been in Australia when there was a row about Australian scientists putting up a statue of a famous Australian explorer in the Antarctic.  The committee demanded to know why waste so much money.  It was explained that they were staking a claim.  The committee demanded to know why the statue wasn’t much, much bigger.

The idea of war for and on another planet (starting with the Moon) has ceased to be H G Wells and is coming into view, it seems.

Melvyn Bragg

Posted by Brian Schuettler at 8:42 am  

Marx Versus Capitalism Versus You

 Analysis & Commentary, Classical Liberalism, Collateral Damage, Coming Social Unrest, Dismal Science-Ignorant Scientists?, Economic Analysis Isn't Science, History of Finance  No Responses »
Oct 222011
 

At Naked Capitalism:

It is a measure of how un-self critical modern economics has been, that the Marxists are starting to appear to be making the most sense of the current crises. The supine acceptance that “the market is always right” — a truism only to traders and vested interests — means that there has been precious little understanding developed about how markets can go wrong. Or what is wrong, as well as right, with markets and the modern practices of capitalism. An article in the London Review of Books came to my attention recently by Benjamin Kunkel that shows how Marxist analysis is actually looking quite pertinent to the current mess.
Read the Rest…

Posted by Brian Schuettler at 4:35 pm  

Missteps to Mayhem

 A State of Distress, AIG and all that....., Analysis & Commentary, “the Greenspan doctrine”, Banks - Crisis Discussion, Bilderbergers 1 USA 0, Collateral Damage, TARP fruit loops, The American Financial Oligarchy, The Arrogance of Power, The Consequences of Greed, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Great American Heist, The Growing American Fascist State, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Suffering Poor, This self-serving arbitrariness, Time For A New Third Party, Unemployment Catastrophe, Unindicted Co-Conspiritors, Unintended Consequences, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still!  No Responses »
Oct 102011
 

Inside the Doomsday Machine with the outsider who predicted and profited from America’s financial Armageddon.

by Michael Burry, MD’97

 

I worry about the future of a nation that would refuse to acknowledge the true causes of the crisis. A historic opportunity was lost. America instead chose its poison as its cure, and the second “Greatest Generation” would never be born.

Today I expect the U.S. government to attempt continuing an easy money policy into the next presidential term—past the meat of the foreclosure crisis, and past the corporate and public financing humps that are upcoming. Junk bonds, incredibly, again are at all-time highs. Quantitative easing seems to be working for now. But this is an invalid validation of what America is doing, a Pyrrhic gamble. As we continue to debase our currency, Bernanke says he is not printing money. Yet I receive an email every day from the Fed saying we just bought another $7 billion or $8 billion in treasuries, monetizing the debt. The scope and breadth of quantitative easing raise severe questions about the Treasury’s needs.

Government borrowing of money for the purpose of injecting cash into society, bailing out banks, brokers and consumers, is an easy decision for a population that has not yet learned that short-sighted easy strategies are the route to long-term ruin. We never quite achieved the catharsis necessary to stoke a deep reevaluation of our wants, needs and fears.

Importantly, the toxic twins—fiat currency and an activist Fed—remain even more firmly entrenched with the financial reforms of last year. The Federal Reserve, having acquired new powers of regulation, has insisted that nothing in the field of economics or finance was of any help in predicting the crisis—period, no more comments. It’s a worthless conclusion that guarantees we’ll make the same mistake again and again.

We need better leaders, but frankly this isn’t going to happen. A problem cannot be solved if it is never acknowledged.

Taxes need to be raised, spending needs to be cut, and loopholes need to be shut if we are to have any hope of returning to a stable base. Home ownership should not be a policy of the U.S. government. The banking system needs substantial reform and bank breakups. Glass–Steagall needs a second run in a strong form. And 22.5 million public workers have no business unionizing against the taxpayer. The list of things that won’t happen—but should happen—goes on and on.

By 2020, interest expense on our national debt could very well exceed $1 trillion. All personal income taxes collected in the U.S. in one year do not total $1 trillion. Our country’s math is scary big, but even scarier is that it simply doesn’t work…

Read the rest here.

Posted by Brian Schuettler at 6:19 pm  

Some things never change…

 A Moral Question - Not A Political One, A Time To Repent, Analysis & Commentary  No Responses »
Sep 252011
 

A remarkable document has been placed today on the “London Banker” blogsite, the testimony of Marriner Eccles to the Senate Finance Committee in early 1933. His testimony later was rewarded by President Roosevelt by bringing Eccles to Washington to help write or draft several seminal laws that essentially saved US capitalism from itself. In fact, “London Banker” highlighted this particular passage from Eccles’ testimony:

It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying. It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.

Where are people such as Marriner Eccles today?

I strongly recommend reading the post in full. Eccles gave a eloquent diagnosis of how the Depression became so severe and intractable, and a cogent, layperson friendly set of recommendations. I have yet to see any similar length discussion of our current crisis that is as clear and compelling.

Posted by Brian Schuettler at 2:41 pm  

BUSH’S TRAGIC LEGACY

 A Changing Europe, A Moral Question - Not A Political One, A State of Distress, A Time To Repent, Analysis & Commentary  No Responses »
Sep 122011
 

How 9/11 Triggered America’s Decline

The events of Sept. 11, 2001 led to a wave of solidarity with the US. But the superpower has lost that goodwill over the course of the wars it subsequently waged. Now America is mainly seen not as the victim of terrorism, but as a perpetrator of violence itself.

*****************

Ten Lost Years

Ten years have passed since Sept. 11, 2001, and today only losers remain. Islam has been taken hostage by blinded ideologues. The West has betrayed its values in its struggle against terror, and we are now burdened with Islamophobes. Without 9/11, the crimes of Anders Behring Breivik and the rise of right-wing populists in Europe would be inconceivable.


Posted by Brian Schuettler at 9:36 am  

Politicians playing poker – Pig-Headed Economic Policy May Still Lead to Disaster

 Analysis & Commentary, Dismal Science-Ignorant Scientists?, Pig-Headed Economic Policy May Still Lead to Disaster, Political Chaos, Political Implications, Read and Weep Entries  No Responses »
Jun 192011
 

The reasons for the lull suggest it should be temporary. First, the tsunami in Japan sent its GDP tumbling and disrupted supply chains, and thus industrial output, around the world, particularly in April. But just as that slump shows up in the economic statistics, more forward-looking evidence points to a rebound. The summer production schedules of American car firms, for instance, indicate that the pace of annualised GDP growth there will accelerate by at least a percentage point.

Second, demand was dented by a sudden surge in oil prices earlier this year. More income is being shifted from cash-strapped consumers in oil-importing countries to producers who tend to sit on their treasures. Costlier fuel has knocked consumer confidence, particularly in gas-guzzling America. And there is still an uncomfortable possibility that further instability in the Arab world will send prices soaring again. Nonetheless, at least for now, the pressure is waning. America’s average petrol price, though still 21% higher than at the beginning of the year, has started to fall. That should boost shoppers’ morale (and their spending).

Third, many emerging economies have tightened monetary policy in response to high inflation. China’s consumer-price inflation accelerated to 5.5% in the year to May. India’s wholesale prices leapt by 9.1%. Slower growth is, in part, a welcome sign that their central banks have taken action, and that those measures are beginning to work. There is no evidence that they have gone too far, even in China, where the worries about bringing the economy down with a bump are loudest. The bigger risk is that nervousness about a weakening world economy leads to a premature pause in the tightening. With monetary conditions still extraordinarily loose, such a loss of resolve would make higher inflation and an eventual crash far more likely.

A growth lull may be just what most emerging markets need, but it is the last thing that any advanced economy wants at the moment. The recovery in the rich world is weak and vulnerable, as recoveries tend to be after balance-sheet recessions. This lull is particularly dangerous because it coincides both with a move away from fiscal and monetary stimulus and with an outbreak of risky political brinkmanship on both sides of the Atlantic.

Pig-Headed Economic Policy May Still Lead to Disaster – The Economist

Posted by Brian Schuettler at 8:40 pm  

THE WORLD FROM BERLIN

 A Changing Europe, A State of Distress, Analysis & Commentary, Back to the basics, Beer Here!, Bilderbergers 1 Germany 0, Collateral Damage, Coming Social Unrest, Patience is a virtue...Delusion is a vice, PIIGS, PIIGS Default?, Political Chaos, Political Implications  No Responses »
Apr 102011
 

‘Euro-Zone Leaders Need the Courage to Tell the Truth’

A day after Portugal formally requested aid from the European Union to help ease ongoing debt problems, Madrid on Friday insisted that it was “out of the question” that Spain would be next. German commentators aren’t so sure, and say that it’s time for European leaders to reveal the true extent of the problems.

Posted by Brian Schuettler at 9:34 am  

Can Europe Be Saved?

 Analysis & Commentary, Collateral Damage, Coming Social Unrest, European Union?, PIIGS Default?, Political Chaos, Secularized Lending, Sub-Prime anytime, The Big Fat Greek Question, The Consequences of Greed, The Financial Elite, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Suffering Poor, Truth In Charity, Unemployment Catastrophe, Unindicted Co-Conspiritors, Unintended Consequences, We Need Open Derivative Models  No Responses »
Jan 172011
 

Paul Krugman does an excellent job of summarizing the genesis of the current crisis:

THERE’S SOMETHING peculiarly apt about the fact that the current European crisis began in Greece. For Europe’s woes have all the aspects of a classical Greek tragedy, in which a man of noble character is undone by the fatal flaw of hubris.

Enlarge This Image

Alfredo Falvo/Contrasto/Redux

ROME Students protested planned changes in the university system on Dec. 22 in Italy, where youth unemployment is about 25 percent.

Not long ago Europeans could, with considerable justification, say that the current economic crisis was actually demonstrating the advantages of their economic and social model. Like the United States, Europe suffered a severe slump in the wake of the global financial meltdown; but the human costs of that slump seemed far less in Europe than in America. In much of Europe, rules governing worker firing helped limit job loss, while strong social-welfare programs ensured that even the jobless retained their health care and received a basic income. Europe’s gross domestic product might have fallen as much as ours, but the Europeans weren’t suffering anything like the same amount of misery. And the truth is that they still aren’t.

Yet Europe is in deep crisis — because its proudest achievement, the single currency adopted by most European nations, is now in danger. More than that, it’s looking increasingly like a trap. Ireland, hailed as the Celtic Tiger not so long ago, is now struggling to avoid bankruptcy. Spain, a booming economy until recent years, now has 20 percent unemployment and faces the prospect of years of painful, grinding deflation.

The tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and noble undertaking: the generations-long effort to bring peace, democracy and shared prosperity to a once and frequently war-torn continent. But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter — to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable. Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns.

The result is a tragedy not only for Europe but also for the world, for which Europe is a crucial role model. The Europeans have shown us that peace and unity can be brought to a region with a history of violence, and in the process they have created perhaps the most decent societies in human history, combining democracy and human rights with a level of individual economic security that America comes nowhere close to matching. These achievements are now in the process of being tarnished, as the European dream turns into a nightmare for all too many people. How did that happen?

THE ROAD TO THE EURO
It all began with coal and steel. On May 9, 1950 — a date whose anniversary is now celebrated as Europe Day — Robert Schuman, the French foreign minister, proposed that his nation and West Germany pool their coal and steel production. That may sound prosaic, but Schuman declared that it was much more than just a business deal.

For one thing, the new Coal and Steel Community would make any future war between Germany and France “not merely unthinkable, but materially impossible.” And it would be a first step on the road to a “federation of Europe,” to be achieved step by step via “concrete achievements which first create a de facto solidarity.” That is, economic measures would both serve mundane ends and promote political unity.

The Coal and Steel Community eventually evolved into a customs union within which all goods were freely traded. Then, as democracy spread within Europe, so did Europe’s unifying economic institutions. Greece, Spain and Portugal were brought in after the fall of their dictatorships; Eastern Europe after the fall of Communism.

In the 1980s and ’90s this “widening” was accompanied by “deepening,” as Europe set about removing many of the remaining obstacles to full economic integration. (Eurospeak is a distinctive dialect, sometimes hard to understand without subtitles.) Borders were opened; freedom of personal movement was guaranteed; and product, safety and food regulations were harmonized, a process immortalized by the Eurosausage episode of the TV show “Yes Minister,” in which the minister in question is told that under new European rules, the traditional British sausage no longer qualifies as a sausage and must be renamed the Emulsified High-Fat Offal Tube. (Just to be clear, this happened only on TV.)

The creation of the euro was proclaimed the logical next step in this process. Once again, economic growth would be fostered with actions that also reinforced European unity.

The advantages of a single European currency were obvious. No more need to change money when you arrived in another country; no more uncertainty on the part of importers about what a contract would actually end up costing or on the part of exporters about what promised payment would actually be worth. Meanwhile, the shared currency would strengthen the sense of European unity. What could go wrong?

Red the entire article at NYT:

Can Europe Be Saved?

By PAUL KRUGMAN

Is there any way to save Europe’s democracies from sinking together in the ill-conceived currency union?

Posted by Brian Schuettler at 10:26 am  

Then the bubble burst

 A State of Distress, Analysis & Commentary  No Responses »
Dec 192010
 

The bipartisan Financial Crisis Inquiry Commission was established by law to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” The hope was that it would be a modern version of the Pecora investigation of the 1930s, which documented Wall Street abuses and helped pave the way for financial reform.

Instead, however, the commission has broken down along partisan lines, unable to agree on even the most basic points.

It’s not as if the story of the crisis is particularly obscure. First, there was a widely spread housing bubble, not just in the United States, but in Ireland, Spain, and other countries as well. This bubble was inflated by irresponsible lending, made possible both by bank deregulation and the failure to extend regulation to “shadow banks,” which weren’t covered by traditional regulation but nonetheless engaged in banking activities and created bank-type risks.

Then the bubble burst, with hugely disruptive consequences. It turned out that Wall Street had created a web of interconnection nobody understood, so that the failure of Lehman Brothers, a medium-size investment bank, could threaten to take down the whole world financial system.

It’s a straightforward story, but a story that the Republican members of the commission don’t want told. Literally.

Wall Street Whitewash Paul Krugman, New York Times

Posted by Brian Schuettler at 12:12 pm  

Every society since the “primitives” has traded and has had very sophisticated oral agreements that were enforced by intricate traditions and customs

 Analysis & Commentary  No Responses »
Dec 122010
 

Matt Ridley’s latest book, The Rational Optimist: How Prosperity Evolves(Harper, 2010), addresses history with a big “H” and dabbles in futurism. Bill Gates, in an exchange with Ridley, notes that though he disagrees with Ridley’s futurism, he admits that there are two ideas in the book that are powerful and important.

The first is that “trade” has been a key to rising prosperity over the course of human history. No argument there, but no novelty either. Adam Smith’s “instinct to barter” has been by now dissected to esoteric boredom, though Ridley manages to put some new life in his narrative.

The second idea is “rational optimism.” Ridley argues that there is no reason to be pessimistic about not solving problems that have been plaguing Africa or those linked to climate change. He argues that humanity has been good at coming up with solutions. Bill Gates, however, remains concerned and recommends urgent action.

Surprisingly, neither one addresses key issues. And Ridley, more than Bill Gates, misses the forest for the trees. The book is like Hamlet without the ghost.

What Drives Innovation and Rational Optimism – Reuven Brenner, Forbes


Posted by Brian Schuettler at 11:14 am  

The real Jamie Dimon

 Analysis & Commentary  No Responses »
Dec 052010
 

Back in 2004, way before the mortgage bust and before Americans thought of banks as four-letter words, Jamie Dimon took charge of JPMorgan Chase & Company. Known as a tough, hands-on manager, Dimon was supposed to avert the sort of foolish risks that tempted so many of his peers. And sure enough, he was different.
http://upload.wikimedia.org/wikipedia/commons/c/ce/Dimon_-_WSJ_hedcut.JPG

Headshot of Jamie D

Instead of reviewing brief summaries of the bank’s operations, as his predecessor had, Dimon demanded to see the raw data — hundreds of pages detailing J. P. Morgan’s businesses every month. Instead of simply trusting his traders, Dimon put himself through a tutorial, so that he would understand the complex trades the bank was exposed to. And rather than run its mortgage machine at full throttle for as long as possible, Dimon reined in lending earlier than did others and warned his shareholders of looming trouble.

Jaime Dimon: Our Least-Hated Banker – Roger Lowenstein, New York Times
Jaime Dimon: Most Dangerous Banker – Simon Johnson, Huffington Post

Posted by Brian Schuettler at 5:42 pm  

Downward Spiral

 A State of Distress, AIG and all that....., Analysis & Commentary, Collateral Damage  No Responses »
Oct 302010
 

Invest by the numbers, not the political rhetoric. Right now the numbers are lousy and downright frightening.



pic
Robert Lenzner


In housing, the Case-Shiller home price index fell almost 3% on an annualized basis in August and September, the weakest performance since May of 2009 when the recession still going on. In 19 of the top 20 cities, prices were down on a seasonally adjusted basis. During the July, August, September period sales of new homes fell at a sickening 41% annual rate to 293,000 units the lowest level ever recorded going back to 1963, when the figures were first kept.

In unemployment, emergency benefits to extend 99 weeks (almost two years) of unemployment benefits are running out or for some 4 million to 5 million people from December through April. This is proof positive that we are on the cusp of a deepening poverty at the very moment of political stalemate. Rosenberg says government handouts are responsible for 20% of disposable income in the country, so pray for the stability of the Social Security system. In personal Income, this loss of unemployment benefits means a loss of income equal to about $300 a week, or about $80 billion totted up, unavailable for consumption

I have seen no other market strategist get down to the prospects for the people at the bottom of the income ladder. Did you know that 38% of middle income families plan to spend less than $500 on holiday gifts, double the number last year?

Nitty Gritty Numbers Suggest a Downward Spiral – Robert Lenzner, Forbes


Posted by Brian Schuettler at 6:14 pm  

If you don’t drink the tea you will love this

 Analysis & Commentary  No Responses »
Oct 032010
 

Tea & Crackers Matt Taibbi, Rolling Stone

This is an article from the October 15, 2010 issue of Rolling Stone.

It’s taken three trips to Kentucky, but I’m finally getting my Tea Party epiphany exactly where you’d expect: at a Sarah Palin rally. The red-hot mama of American exceptionalism has flown in to speak at something called the National Quartet Convention in Louisville, a gospel-music hoedown in a giant convention center filled with thousands of elderly white Southerners. Palin — who earlier this morning held a closed-door fundraiser for Rand Paul, the Tea Party champion running for the U.S. Senate — is railing against a GOP establishment that has just seen Tea Partiers oust entrenched Republican hacks in Delaware and New York. The dingbat revolution, it seems, is nigh.

“We’re shaking up the good ol’ boys,” Palin chortles, to the best applause her aging crowd can muster. She then issues an oft-repeated warning (her speeches are usually a tired succession of half-coherent one-liners dumped on ravenous audiences like chum to sharks) to Republican insiders who underestimated the power of the Tea Party Death Star. “Buck up,” she says, “or stay in the truck.”

Stay in what truck? I wonder. What the hell does that even mean?

——————

An interested rather over the top perception of the tea party emergence…

——————-

Related Gallery: Forty Years of Rolling Stone‘s Political Covers

Posted by Brian Schuettler at 10:00 am  

War leads to prosperity!…Think again.

 Analysis & Commentary, Back to the basics, Deficit Death Spiral, Deflation-Inflation-Stagflation, Deleveraging, Dismal Science-Ignorant Scientists?, Economic Analysis Isn't Science, Insolvency, Integrity and Responsibility, Is The Market Rally Real?, It Is Nice To Be Part of the Elite!, It Is Supposed to be a Republic!, It starts with a foundation, Let's Call What It Is - DEPRESSION, Moral Hazard, Negative Cash Flow, Obama Bingo, Obama's Hypocrisy, Our phony middle class, Patience is a virtue...Delusion is a vice, Political Chaos, Small Business-Bedrock of America, Smaller Can Be Better, Socialism, TARP fruit loops, Taxes, Taxes and Taxes, The American Financial Oligarchy, The Arrogance of Power, The Consequences of Greed, The Democrats Blew It Again, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The New American Socialism, The Obama OMG magic factory, The Sorry State Of American Manufacturing, The Suffering Poor, Unemployment Catastrophe, Unindicted Co-Conspiritors, Unintended Consequences, US Trade Imbalance, USA Is the New Japan, Wage Deflation, Watch The China Market, We Are All Cooked, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still!  No Responses »
Sep 122010
 

The Nobel Prize committee has never withdrawn a prize. It might want to consider it. In Tuesday’s New York Times, prizewinner in economics, Paul Krugman reveals either that he knows nothing about economics…or that there is nothing worth knowing in it. We’re beginning to think it’s the latter.

“From an economic point of view,” he writes, “World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Deficit spending created an economic boom – and the boom laid the foundation for long-run prosperity….”

In the 1938 US elections, voters showed what they thought of the New Deal; Democrats lost 70 seats in the House. Then as now, the public had lost faith in public spending, says Krugman. Nearly two out of three of those polled said they were opposed to stimulus efforts. Roosevelt buckled under the pressure; he drew back from further spending to fight the slump.

Thank God for WWII! No one opposes military spending in time of war. Krugman made his position clear in 2008 in his New York Times blog.

“The fact is that war is, in general, expansionary for the economy, at least in the short run. World War II, remember, ended the Great Depression.”

According to this line of thinking, the best form of stimulus spending is money spent on the military. It creates consumer demand without creating consumer supply. Consumer prices rise; people spend. The slump is soon over.

But if WWII helped the US economy, think what it must have done for Japan; proportionally, its stimulus efforts dwarfed those of the US…and began much earlier. Just this week, Ichiro Ozawa, running for prime minister of Japan, vowed to take “every measure” to lower the yen and promised a stimulus package more than twice as big as the current program. He was just following in the footsteps of Japan’s leaders from the ’30s. It was “economic security” they said they were after. And they thought they could get it by central planning and government spending. Military spending rose from 31% of the budget in the early ’30s to nearly 50% five years later. By the early ’40s it was around 70% and nearly 100% later on. Deficits and debt soared.

Did that create a boom? You bet it did. Japan was the first nation to get out of the global slump. It boomed…and boomed…and ka-boomed. When it came to warships, planes, and soldiers, Japan was soon among the richest nations in the world. Yes, Americans had more electric fans, automobiles, central heating, aspirin, ice cream, and the rest of the paraphernalia of civilized life at the time. In the mid-’30s, the US produced 40 times as many autos per person as did Japan. Even during the Great Depression, the US out-produced Japan by a factor of 7 and its workers earned 10-times as much money.

Economists can’t even measure real prosperity, let alone fiddle it. So they put on the GDP and employment numbers the way a bald man puts on a cheap wig. It makes him look ridiculous and fraudulent, but it’s the best he can do. Unemployment disappears in a war economy. Japan put a million men in uniform. Two million more were part-time reservists. Those who weren’t in the army were put to work building tanks and planes. By 1941, Japan could produce 10,000 planes a year. If you were a swallow you wouldn’t want to build your nest in Japan’s factory chimneys; they belched smoke night and day.

And talk about fiscal stimulus! Krugman would have loved it – stimulus unfettered by real money or even a casual regard for real prosperity. Takahashi Korekiyo was known as the “Japanese Keynes.” Gillian Tett notes in The Financial Times that he was assassinated in 1936 after he came to his senses and tried to bring state finances under control. He was done in by army officers who did not want the stimulus to stop. Not that we’re being judgmental about it. As far as we know, the quality of central banking could probably be improved by an occasional assassination.

Takahashi wasn’t the first. Before him Junnosuke Inoue had held out for the gold standard and balanced budgets. He was out of office by 1931 and out of luck in 1932, when he was murdered. The gold-backed yen was abolished the day he left office. Then, public spending, deficits, central planning, debt, and inflation ran wild. By 1939, the Japanese were spending $5 million a day on their war with China – a huge sum for the Japanese at the time.

Was the economy improved by all this spending? No, it was perverted…hammered into a grotesque imposter – a parody of a real economy. Most of the nation’s resources were put to work building things almost no one wanted. Then, after the attack on Pearl Harbor, the stimulus efforts were redoubled. Rations were reduced further. Working hours were extended. What few consumer items were available were three times as expensive at the end of the war as they had been when it began. Men were conscripted into factories and the army. Women were expected not only to make the tanks, but to join the home-guard and prepare themselves to repulse the American invaders with sharpened bamboo sticks. What a marvelous economy – operating at full capacity and full employment until General MacArthur finally put it out of its misery.

You say Obama; I say Ozawa! You say boom; I say ka-boom!

By Bill Bonner

Posted by Brian Schuettler at 9:15 am  

Obama’s Economic “Plan”: Ten Times Less Than Adequate and Far, Far Too Late

 Analysis & Commentary, Back to the basics  No Responses »
Sep 072010
 

Obama’s Economic “Plan”: Ten Times Less Than Adequate and Far, Far Too Late Friedoglake

McCain, who was thoroughly beaten in the 2008 election in part because his economic policies were seen as too tied to the policies that produced the financial meltdown, now is calling for Bush’s tax cuts to be made permanent. Making the Bush tax cuts permanent has the pitiful stimulative factor of 0.29 in Zandi’s table. Inexplicably, the economist who is the “go to” source for why tax cuts are bad public policy when trying to stimulate the economy and who worked for McCain during that campaign, but now works for Democrats,  is pushing tax cuts, apparently against his own advice. Note, however, that unlike McCain, who wants to make the cuts permanent, Zandi is advocating extending them a year or two.

That makes today’s announcement that Obama is backing off the prospect of hundreds of billions of dollars worth of payroll tax holiday appear to be good news. However, when we look at Zandi’s table, we see that payroll tax holidays have a stimulative effect of 1.29, so it is the “least bad” of tax cuts. With the $100 billion in R&D tax credits Obama is now proposing in its stead, the stimulative factor drops (that particular tax is hard to place into Zandi’s table, but likely would fall close to the value of 1.03 seen for across the board tax cuts).

Finally, Obama’s pitiful $30 billion (or is it $50 billion?) offered as infrastructure spending is a ridiculous move if it is meant to be evidence that he is attempting to do anything to stimulate the economy. Such spending would need to be higher by at least a factor of ten before it begins to even be worth putting into a Krugman-style analysis for its possible effect on reducing unemployment. Recall that in the previous analysis, Krugman worked from the assumption that it takes $300 billion of GDP growth in a year to reduce unemployment by 1%. If this “plan” is the best that the Obama economic team of geniuses can produce, Democrats don’t need to bother showing up for the 2010 or 2012 elections.

Posted by Brian Schuettler at 9:54 am  

FDR’s Depression Policies: Good Deal or Raw Deal?

 Analysis & Commentary  No Responses »
Aug 292010
 

On July 9, 2010 at the FreedomFest Conference in Las Vegas (www.freedomfest.com), FEE president Lawrence W. Reed debated University of Nevada-Las Vegas economist Bernard Malamud on the subject of the New Deal policies of Franklin Roosevelt. This is a video recording of that 50-minute debate.

Posted by Brian Schuettler at 8:39 am  

The Committee to Defraud the World

 A Moral Question - Not A Political One, A Shareholder-Not Just a "Stakeholder", A Time To Repent, AIG and all that....., Analysis & Commentary, Bilderbergers 1 USA 0, Collateral Damage, Coming Social Unrest, Consumption Ran the Old Economy, Coup d'etat in America, Death of the Dollar, Deflation-Inflation-Stagflation, Devaluation, Did they ever hear of GAAP?, Dismal Science-Ignorant Scientists?, Economic Analysis Isn't Science, Even the Terminator Can't Help California, Goldman: Underwriter or Undertaker?, Greenspan is kind of stupid, Insolvency, It Is Supposed to be a Republic!, Jacksonian Democracy, Let's Call What It Is - DEPRESSION, Moral Hazard, No Bank Is Indispensable, Obama's Hypocrisy, Our phony middle class, Patience is a virtue...Delusion is a vice, Small Business-Bedrock of America, Smaller Can Be Better, Social Security Time bomb, Socialism, TARP fruit loops, The American Financial Oligarchy, The Arrogance of Power, The Consequences of Greed, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, The New American Socialism, The Obama OMG magic factory, The Sorry State Of American Manufacturing, The Suffering Poor, Those Quarky Accounting Rules, Time For A New Third Party, Truth In Charity, Unemployment Catastrophe, Unindicted Co-Conspiritors, Unintended Consequences, USA Is the New Japan, Wage Deflation, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still!  No Responses »
Aug 012010
 

To say now that ‘No one knew’ or ‘I was mistaken’ or ‘I was just doing as I was told’ is another in a series of lies and deceptions that have supported one of the greatest frauds in the history of the world.

But this is not history. This episode of fraud is still playing itself out now. And to fail to understand the depth and breadth of this madness is to place oneself in peril, and in the power of those who are twisting the Western economic and political system even now to satisfy their lust for wealth and power. You are only successful if you can keep what you kill.

Glass-Steagall fell after a decade long campaign involving hundreds of millions in lobbyist money spread lavishly around the Congress, led by Sanford Weil of Citibank, supported by key banking and political figures in the Congress and at the Fed. It involved Senator Phil Gramm, who helped to put a stake in the heart of the financial regulatory process under the Reagan free markets banner, and who recently said the problem is that the middle class were a bunch of whiners. As did his wife Wendy, who as the chairperson of the CFTC had exempted Enron from regulatory oversight, and then left to take a position there on its board of directors.

Like the Mortgage Backed Securities scandal it involved surprisingly few principal players, like Alan Greenspan and Robert Rubin, who used their power and influence to silence and ostracize critics, and promote a climate of reckless disregard for the public trust under the meme of ‘efficient markets’ and deregulation. This might have been an innocent policy error if it did not involve premeditated theft on a massive scale, followed by cover ups, denials, and a control fraud that exists even today.

But it also involved literally thousands of collaborators and enablers, from mainstream media people, economists, analysts, and other thought leaders to politicians and regulators who saw that it was to their advantage to at least passively support this scheme which they knew very well was a fairy tale, a fraud, class warfare by a new name, but were able to hide their own guilty consciences behind self-serving rationalization and the shield of plausible deniability.

History, and hopefully the justice system, will sort this all out. It is difficult, even now, to get one’s mind around the enormity of it. This is its most powerful weapon. Who could be such monsters, so amoral, so destructively sociopathic? Future generations will regard it as an episode of madness, driven by a few people in a tight circle of self-reinforcing thought, people with remarkably similar cultural and educational backgrounds, driven by a consuming lust for power, that were able to dupe and delude an entire nation made vulnerable by propaganda, a co-opted press, and apathy.

In the meanwhile all the great mass of people can do is to watch, and wait, and seek to protect themselves from these ravening wolves grown increasingly desperate, as their arrogance comes to a tragic fall. They can vote out incumbents, but the parties choose the candidates, and too often they resemble competing crime families of special interests more than pillars of a representative government, saying one thing to get elected and doing another thing once in office.

This is the approach of trouble when hubris is at its height, and the few feel they have everything to gain and nothing to lose, if only they can gain more power, and necessarily become more ruthless. They are trapped in a cycle of fear and greed. The fear provokes the lies and the cover ups, but the greed promotes the extension of the fraud and the theft, requiring even more lies and cover ups. The operative word is ‘over reach,’ in a classic late stage Ponzi scheme. This will undoubtedly add to the confusion as the truth is assaulted by the big lie.

The last vestiges of polite society are often shed as the downfall reaches it final conclusion, at the end, when all is revealed, at last. And so there will be great danger.

Jesse’ s Cafe http://jessescrossroadscafe.blogspot.com/2010/07/committee-to-defraud-world.html

Posted by Brian Schuettler at 4:25 pm  

Physics and Money

 Analysis & Commentary  No Responses »
Aug 012010
 
Correct me if I’m wrong Sandy, but if I kill all the golfers, they’re gonna lock me up and throw away the key.
— Carl Spackler
For simplicity, but also quite accurately, you could define the Modern Era with Newton’s Second Law: F=MxA. Though more accurately for this piece, we can use the derivative Acceleration = Force divided by Mass. Simply, this is one equation that defines the movement and shaping of physical things. At it’s foundation, the Modern Era has been the human use of fossil fuel energy, coal, oil, and more recently natural gas, to shape and move physical things. Using these energy supplies, these forces, has allowed humanity in the past two-centuries, to reshape and move about this planet in ways unprecedented from the rest of human history. Now there’s been plenty of good in this, but also, and much less debated, plenty bad. Whether good or bad, this reshaping and movement allowed the transformation of locality, the ability to transcend defining by the local, leading paradoxically to ever increasing homogeneity.

On physics and money Joe Costello

Posted by Brian Schuettler at 10:06 am  

What the bond guru sees coming

 Analysis & Commentary, Bill Gross  No Responses »
Jul 252010
 

What about the possibility of deflation occurring?

We’re in a struggle between inflation and deflation right now. We may never get to a negative consumer price index, but the danger is a drop in asset prices and the destruction of credit. It means corporate bonds defaulting because companies aren’t getting enough business and they can’t pay off their debts. It means foreign governments defaulting. It’s individuals with mortgages who can’t get out from under their 16 tons of debt. The economy can’t recover, and unemployment stays high. Stocks would be in trouble because some companies would be going bankrupt while others couldn’t get the credit they need to grow.

So which is the bigger risk now — inflation or deflation?

Our investment committee has sketched out four possible scenarios. Scenario A is that the global economy rebounds back to past levels of high growth. B is just a decent rebound. C is that new normal — half-sized growth. And D is deflation, debt, destruction. I’d say we’re at a C — right now. We believe in the new normal, but what we’re seeing in Europe puts the minus on that C grade.

What does the “new normal” mean for our readers?

Instead of 10% returns for stocks, look for five or so. And instead of the past 20 years’ returns on bonds, which are actually better than stocks — close to double digits — it’s 4% going forward. So that’s what the new normal is. And it’s based upon the primary assumptions of a deleveraging of the private sector and the public sector being limited in what it can spend.

If stocks might return just a percentage point or two over bonds, does that justify the risk?

Barely.

Why is it so hard to get growth going?

The lack of what economists call aggregate demand. So much of the world’s growth and financial surplus have shifted to Asia, where people are fixated on saving instead of buying. Consumption in China is just 35% of GDP, half our rate.

What should investors make of the Fed’s policy of keeping rates close to zero?

The Federal Reserve wants your readers and Pimco to make a choice. You get almost nothing if you hold short-term Treasury bills. The Fed wants you and Pimco to buy the assets that were depressed 18 months ago — stocks, high-yield bonds, etc. — to restimulate the economy. Because this economy has been based on asset appreciation.

Are those the right policy moves? It seems as if we’re just maintaining America’s dependence on high asset values and debt.

I think it’s the only choice, although there’s debate here. You have people like economist Paul Krugman on one side who suggest we must do whatever is necessary to avoid deflation. Advocates on the other side basically echo what Treasury Secretary Andrew Mellon said at the start of the Depression, that we have to liquidate — let real estate, asset values, and wages fall — and then we can start to grow again. I’ve always felt that if you did that, if you liquidated everything, then optimism, the necessary ingredient for successful capitalism, would completely be eliminated.

At the same time, I admit we should have stopped the habit of debt and asset appreciation long ago. We didn’t. Too bad. But at this point what the Fed wants, what the Treasury wants, what the European Union wants, is for the economy to renormalize, so that governments can play lesser roles, and the private sector can do its thing.

If the biggest dangers are overseas, does it still make sense to diversify your portfolio globally?

Yes, definitely. As a bond investor, however, the problem is that many parts of the world that are doing well and will probably continue to do relatively well — China, much of Asia, Brazil — don’t have developed credit markets. We’ve been buying Brazilian bonds hand over fist. Brazil has low debt, and it has really high interest rates. But an individual would have a hard time doing that. Investors can’t buy a Chinese bond — their debt is internalized. But you can also diversify by investing in developing-market equities.

States and cities are going broke left and right. Should investors be worried about muni bonds?

Warren Buffett, as usual, zeroed in on this. It all depends on whether or not the federal government rescues the states. It has done it in the past 12 to 18 months, with stimulus packages, with Medicaid and education grants, and so on. And Obama is proposing more help.

So you’re suggesting there might be an opportunity there?

At the moment, the Republican orthodoxy is gaining sway, so the administration has to be careful as to what checks it writes. But I can’t imagine California, Illinois, or New Jersey going under. We’ve been buying some taxable munis. We bought New York City bonds last week, which gets us a 6.5% yield.

That’s a nice yield, but overall this “new normal” of low returns won’t be much fun.

The important thing to recognize is that if you’re looking for 10% returns to pay for college or to retire on, they’re not going to be there. We’ve been an asset-growth-based economy for so long. We’ve skimmed off the top, living off second and third mortgages on homes, and capital gains on stocks and even on bonds. Now instead of having money work for you, you’ve got to work for your money.

What Bill Gross Sees Coming
- Pat Regnier, CNNMoney

Posted by Brian Schuettler at 10:02 am  
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