Declining Confidence in US Fiscal and Monetary Policies

A lot has happened in the last two years. When I look back onto 2008 and the first half of 2009, I see that the world is entering a paradigm shift. Structural changes have to be made to restore (my) confidence in the US market. America's leadership in the world is faltering and it still doesn't seem to understand what the underlying problems of its policies are. It is obvious that the political agenda's are too short-term and therefore a major threat to US national security and prosperity.

Following the collapse of Lehman Bros. the financial world shook on its remaining pillars. Never in modern times was systemic risk so obvious, liquidity severely constrained, banks tightening credit and loan facilities while hoarding for cash to fill up gaps in their (highly leveraged, 20-50:1) balance sheets and governments worldwide bailing out private (mostly financial) institutions to make sure the average Joe on the street received his monthly paycheck on time. When credit stops flowing, businesses can't make payments for goods and services and paychecks can't be fulfilled. In order to limit the damage that started with securitization (a treat of financial innovation) on Wall Street, banks were bailed out to avoid imminent bankruptcy, which would restrict the remaining credit facilities even further.

Under the current Obama administration the fallacy of consumer borrowing and spending is destined to continue, even considering the US national total debt per citizen is currently $38,000 and rising. When we include unfunded US liabilities the picture shows to be even more dire at $191,000 for every man, woman and child. See US National Debt Clock for real time details.

During the 2002 - 2007 timeframe, investors were overwhelmed with easy credit. Speculation and malinvestment were abundant, especially in the housing market. The policies were aligned through Washington for all American's to own a home. After 9-11 the Fed's discount window interest rate was lowered to 1%. Wall Street made use of that easy credit and some of the regulatory key figures let it happen on their watch. In short, low FED rates where the cause of excess liquidity spurring unregulated home ownership in America following 9-11 where George W. Bush told his nation to go out and spend America to prosperity in order to avoid the (much needed) recession after the NASDAQ tech-bubble collapsed.

Alan Greenspan always was a great believer in market forces. He believed that the market would always regulate itself, as he opined that employees always would deal in the interest of the company and not mainly for personal gains. Greenspan believed that bubbles are not an issue for government regulation. In May 2005 he said in a speech: "Private regulation generally has proved far better at constraining excessive risk-taking than has government regulation". Recently Greenspan came back from that statement and told the world that he made a mistake by thinking the market would regulate itself. Clearly greed is of a larger factor for long-term corporate survival.

Even more so disturbing is the fact that Greenspan reassured (first-time) homebuyers in 2004 about taking on ARM mortgages (Adjustable Rate Mortgages) when the first signs of overheating were already present in some local markets. How wrong could he be in hindsight. For me, the ordinary man on the street its hindsight but I doubt if Greenspan didn't had enough information in his circles that showed him that his economic model was early flawed. One of the indications should be the huge bonusses that drove performance. A man of his numeric intelligence should have seen the equation of low FED discount rates, high leverage, monetary expansion (M3) and the urge for high corporate earnings (PE ratios) to get investors interested in buying more of their stocks.

People now have to get their head straight and educate themselves about cause and effects of misguided monetary and fiscal policies for their own benefit and vote accordingly in the next decades to come. It is of upmost importance that American's see that their elected officials are playing partizan games in the House and Congress, putting high-ranking people in places like the FED and US Treasury that are aligned in their political will. In fact, I think that the Federal Reserve is way to aligned with the US government agenda, which currently says: expand government to save jobs and increase fiscal spending to please (better: to save) our constituencies. The FED as a private entity should do the exact opposite of what government wants in order to restore balance in the economy. To limit government and lower the deficit by raising interest rates as soon as possible. Yet they lack the courage or the right type of people to do so.

One thing is for sure though, irresponsible corporate exhuberance is (temporarily) done for and so is the American dream 1.0. The people's confidence is lost although American morale and optimism appears undented. Reality clearly indicates the need for structural sacrifice and financial regulation reform in the short term. The current spending binge from the Obama administration doesn't really help that idea come into reality. As a result, record high debt levels are frightening to look at with US national debt to GDP ratio currently at 100%. Include unfunded national liabilities like Medicare/Medicaid plus Social Security and the total US national debt to GDP reaches 400%. Thats a true debt spiral only serviceable by printing fiat dollars and thus rigorously debasing the dollar value, or simply by default.

Printing money is the only solution to fake growth and increase nominal asset prices when investors slowly increase their awareness of the coming debt spiral and retract their money out of dollar denominated assets in the coming years. In my view, its bound to happen unless government spending is cut, personal savings are increased and a renewed manufacturing base is in place.

Some people talk about avoiding the lost decades of Japan by means of loosening credit as part of the Keynesian ultimate dream (fallacy). Ironically America is walking into the same two decade trap at the very least caused by their own political ignorance and irrational spending. Time will tell.

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Hyperinflation Nation

To all my friends in the once mighty US of A, I would like to say: hold on guys, cause there some serious sh@t coming your way under the current Obama policy proposals.

Below I've added some interesting view of one of the first video's of National Inflation Association that shows us what is truly happening among the elites of America. Its time you all got sick. Sick of politicians and pork spending. Its time you take a stand an follow up on your pride and freedom where America stands for. Be patriotic and support congressman Ron Paul to fight this ignorant bunch of politicians that have other agenda's then the voter needs.

Take the political right in your own hands. Strife for a full audit of the Federal Reserve as this private entity is inflating your valued dollar away from you, unaudited. The FED uses the world and your nations wealth to perform their own glorious manipulative agendas to the benefit of their own. Its a scam.

Educate yourselves people. America is going down on a lack of principles and common logic. Follow the constitution and keep it simple but effective. The free market will always prevail. Government is there for economic stability and law and order. Not for free market manipulation. End it all. Right now. Vote Ron Paul, listen to Freedom Watch with Judge Andrew Napolitano. Read yourself into Peter Schiff and others that rely on the Austrian School of Economics.

Keynesianism is like Communism, Marxism and Socialism. Eventually it will all fail due to the nature of mankind. We are greedy. Only Capitalism has worked for us. The ones that work hard should get the rewards. A minimal social buffer is a good thing, if regulated (the framework that is) by government, but executed by the private sector, like healthcare for instance...

Its up to you, my American friends. I'm just a single European watching the demise of a glorious nation and its dollar currency...

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Suitcase With $134 Billion Puts Dollar on Edge: William Pesek

June 17 (Bloomberg) -- It’s a plot better suited for a John Le Carre novel.

Two Japanese men are detained in Italy after allegedly attempting to take $134 billion worth of U.S. bonds over the border into Switzerland. Details are maddeningly sketchy, so naturally the global rumor mill is kicking into high gear.

Are these would-be smugglers agents of Kim Jong Il stashing North Korea’s cash in a Swiss vault? Bagmen for Nigerian Internet scammers? Was the money meant for terrorists looking to buy nuclear warheads? Is Japan dumping its dollars secretly? Are the bonds real or counterfeit?

The implications of the securities being legitimate would be bigger than investors may realize. At a minimum, it would suggest that the U.S. risks losing control over its monetary supply on a massive scale.

The trillions of dollars of debt the U.S. will issue in the next couple of years needs buyers. Attracting them will require making sure that existing ones aren’t losing faith in the U.S.’s ability to control the dollar.

The dollar is, for better or worse, the core of our world economy and it’s best to keep it stable. News that’s more fitting for international spy novels than the financial pages won’t help that effort. It is incumbent upon the U.S. Treasury to get to the bottom of this tale and keep markets informed.

GDP Carriers
Think about it: These two guys were carrying the gross domestic product of New Zealand or enough for three Beijing Olympics. If economies were for sale, the men could buy Slovakia and Croatia and have plenty left over for Mongolia or Cambodia. Yes, they could have built vacation homes amidst Genghis Khan’s Gobi Desert or the famed Temples of Angkor. Bernard Madoff who?

These men carrying bonds concealed in the bottom of their luggage also would be the fourth-largest U.S. creditors. It makes you wonder if some of the time Treasury Secretary Timothy Geithner spends keeping the Chinese and Japanese invested in dollars should be devoted to well-financed men crossing the Italian-Swiss border.

This tale has gotten little attention in markets, perhaps because of the absurdity of our times. The last year has been a decidedly disorienting one for capitalists who once knew up from down, red from black and risk from reward. It almost fits with the surreal nature of today that a couple of travelers have more U.S. debt than Brazil in a suitcase and, well, that’s life.

Clancy Bestseller
You can almost picture Tom Clancy sitting in his study thinking: “Damn! Why didn’t I think of this yarn and novelize it years ago?” He could have sprinkled in a Chinese angle, a pinch of Russian intrigue, a dose of Pyongyang and a bit of Taiwan-Strait tension into the mix. Presto, a sure bestseller.

Daniel Craig may be thinking this is a great story on which to base the next James Bond flick. Perhaps Don Johnson could buy the rights to this tale. In 2002, the “Miami Vice” star was stopped by German customs officers as he was traveling in a car carrying credit notes and other securities worth as much as $8 billion. Now he could claim it was all, uh, research.

When I first heard of the $134 billion story, I was tempted to glance at my calendar to make sure it didn’t read April 1.

Let’s assume for a moment that these U.S. bonds are real. That would make a mockery of Japanese Finance Minister Kaoru Yosano’s “absolutely unshakable” confidence in the credibility of the U.S. dollar. Yosano would have some explaining to do about Japan’s $686 billion of U.S. debt if more of these suitcase capers come to light.

‘Kennedy Bonds’
Counterfeit $100 bills are one thing; two guys with undeclared bonds including 249 certificates worth $500 million and 10 “Kennedy bonds” of $1 billion each is quite another.

The bust could be a boon for Italy. If the securities are found to be genuine, the smugglers could be fined 40 percent of the total value for attempting to take them out of the country. Not a bad payday for a government grappling with a widening budget deficit and rebuilding the town of L’Aquila, which was destroyed by an earthquake in April.

It would be terrible news for the White House. Other than the U.S., China or Japan, no other nation could theoretically move those amounts. In the absence of clear explanations coming from the Treasury, conspiracy theories are filling the void.

On his blog, the Market Ticker, Karl Denninger wonders if the Treasury “has been surreptitiously issuing bonds to, say, Japan, as a means of financing deficits that someone didn’t want reported over the last, oh, say 10 or 20 years.” Adds Denninger: “Let’s hope we get those answers, and this isn’t one of those ‘funny things’ that just disappears into the night.”

This is still a story with far more questions than answers. It’s odd, though, that it’s not garnering more media attention. Interest is likely to grow. The last thing Geithner and Federal Reserve Chairman Ben Bernanke need right now is tens of billions more of U.S. bonds -- or even high-quality fake ones -- suddenly popping up around the globe.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo atwpesek@bloomberg.net

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A New Era

Just recently, the vice-president elect Joe Biden said some remarkable words about the threat that lies behead. Mr. Biden said; "Mark my words. It will not be six months before the world tests Barack Obama like they did John Kennedy. The world is looking."

Was Biden right or what? Within 24 hours after the election of the new President-elect Barack Obama, Russia elected to stir things up. Russian President Medvedev said: "Kremlin would station missiles in the tiny Russian enclave of Kaliningrad, which borders Poland, in response to US plans for an anti-missile system in Eastern Europe."

The Russian newspaper Vedomosti predicts that Putin could retake his position as Russia’s President somewhere in 2009 Setting Medvedev aside. That is just like getting back to the cold war again, this time without the uranium and colonial offensives. Only this time, the world has changed. Now we have the credit crisis, peak-oil crisis, global warming crisis…and Putin is using oil and commodities as strategic weaponry.

With all the (global) change on our planet and especially with oil at $65 a barrel and heading lower, (pushing Russia, Venezuela, Iran and others slowly into crisis-mode), the oil-autocracies of the world are becoming somewhat irritated. Most of these countries need a price of $70 – $90 dollars a barrel-oil to cover their domestic social budgets. Saudi Arabia could have some more slack to a more reasonable $50 dollars per barrel-oil. Don’t forget that Iran and the Saudi’s already reached their peak-oil discussions some time ago. With the latter having the largest reserves and thus the most swing capacity available. Oil prices will rise eventually (either OPEC manipulated or by demand), but will gold follow suit?

Probably not. We have seen the oil/gold ratio of 15.1 fall apart. Today it stands near 7.5. If we believe some of the experts out there, gold could be touching $500 this Christmas. In another article I sensed that the indicators are turning worse. First by global recession following the drop in overall demand. Second by aiming at possible monetary deflation situation in about 6 - 9 months from now. Keep your eyes at the overnight interest rate as an (rough) indicator. It will drop to zero within a year if the economy evolves into depression. Another indication would be rising unemployment numbers.

According to the new ‘doctor Doom’ also known as Dr. Nouriel Roubini, there is a new phenomenon occurring known as ‘stag deflation’. Roubini’s four forces of stag deflation are:
1. a slack in goods markets,
2. a "recoupling" of the rest of the world with the U.S. recession,
3. a slack in labor markets, and
4. a sharp fall in commodity prices.
These factors would, "reduce inflationary forces and lead to deflationary forces in the global economy," he writes in an article in Forbes.

I found another economic expert known as John Williams from shadowstats.com who has a more elaborate explanation about the US government’s manipulation in CPI and the M3 numbers (see shadowstats website). Below I attached an interesting video from CNN Money (February 2008). Williams points out how the M3 money supply keeps expanding instigated by the FED, accompanied with the asset deflation and (real) inflation that hits the markets with approx. 6 – 12 months of delay caused by the system. By the end of 2009 he expects the global downturn to evolve into a depression. CNN Money - John Williams

Several scenarios of the current situation could come out into a continuous downfall for the global economy in the coming months. When FED-created (bailout) money hits the ground in the real economy, inflation explodes instantly. But it’s possible that inflation will not make it into the real economy as monetary deflation sets in. How that transition works out is unknown. Basically it could boost gold shortly or possibly not at all. As you know, the markets are volatile and behave mainly on investor emotions. My overall advice to you still is: remain out of commodities and miner stocks. Take a small portion of gold bullion into your portfolio for the long run. No more than maximum of 10 percent of your total investment money as some form of protection in this new era. History in the making.

By Rob de Graaf

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Crisis May Make 1929 Look a 'Walk in the Park'

As central banks continue to splash their cash over the system, so far to little effect, Ambrose Evans-Pritchard argues that things risk spiralling out of their control

Twenty billion dollars here, $20bn there, and a lush half-trillion from the European Central Bank at give-away rates for Christmas. Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects.

As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world's central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.

"Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.
"It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds.

Lenders are hoarding the cash, shunning peers as if all were sub-prime lepers. Spreads on three-month Euribor and Libor - the interbank rates used to price contracts and Club Med mortgages - are stuck at 80 basis points even after the latest blitz. The monetary screw has tightened by default.

York professor Peter Spencer, chief economist for the ITEM Club, says the global authorities have just weeks to get this right, or trigger disaster.

"The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard," he says.

"They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don't think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park," he adds.

The Bank of England knows the risk. Markets director Paul Tucker says the crisis has moved beyond the collapse of mortgage securities, and is now eating into the bedrock of banking capital. "We must try to avoid the vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply, and slower aggregate demand feed back on each other," he says.

New York's Federal Reserve chief Tim Geithner echoed the words, warning of an "adverse self-reinforcing dynamic", banker-speak for a downward spiral. The Fed has broken decades of practice by inviting all US depositary banks to its lending window, bringing dodgy mortgage securities as collateral.

Quietly, insiders are perusing an obscure paper by Fed staffers David Small and Jim Clouse. It explores what can be done under the Federal Reserve Act when all else fails.

Section 13 (3) allows the Fed to take emergency action when banks become "unwilling or very reluctant to provide credit". A vote by five governors can - in "exigent circumstances" - authorise the bank to lend money to anybody, and take upon itself the credit risk. This clause has not been evoked since the Slump.

Yet still the central banks shrink from seriously grasping the rate-cut nettle. Understandably so. They are caught between the Scylla of the debt crunch and the Charybdis of inflation. It is not yet certain which is the more powerful force.

America's headline CPI screamed to 4.3 per cent in November. This may be a rogue figure, the tail effects of an oil, commodity, and food price spike. If so, the Fed missed its chance months ago to prepare the markets for such a case. It is now stymied.

This has eerie echoes of Japan in late-1990, when inflation rose to 4 per cent on a mini price-surge across Asia. As the Bank of Japan fretted about an inflation scare, the country's financial system tipped into the abyss.

In theory, Japan had ample ammo to fight a bust. Interest rates were 6 per cent in February 1990. In reality, the country was engulfed by the tsunami of debt deflation quicker than the bank dared to cut rates. In the end, rates fell to zero. Still it was not enough.

When a credit system implodes, it can feed on itself with lightning speed. Current rates in America (4.25 per cent), Britain (5.5 per cent), and the eurozone (4 per cent) have scope to fall a long way, but this may prove less of a panacea than often assumed. The risk is a Japanese denouement across the Anglo-Saxon world and half Europe.

Bernard Connolly, global strategist at Banque AIG, said the Fed and allies had scripted a Greek tragedy by under-pricing credit long ago and seem paralysed as post-bubble chickens now come home to roost. "The central banks are trying to dissociate financial problems from the real economy. They are pushing the world nearer and nearer to the edge of depression. We hope they will eventually be dragged kicking and screaming to do enough, but time is running out," he said.

Glance at the more or less healthy stock markets in New York, London, and Frankfurt, and you might never know that this debate is raging. Hopes that Middle Eastern and Asian wealth funds will plug every hole lifts spirits.

Glance at the debt markets and you hear a different tale. Not a single junk bond has been issued in Europe since August. Every attempt failed.

Europe's corporate bond issuance fell 66pc in the third quarter to $396bn (BIS data). Emerging market bonds plummeted 75pc.

"The kind of upheaval observed in the international money markets over the past few months has never been witnessed in history," says Thomas Jordan, a Swiss central bank governor.

"The sub-prime mortgage crisis hit a vital nerve of the international financial system," he says.

The market for asset-backed commercial paper - where Europe's lenders from IKB to the German Doctors and Dentists borrowed through Irish-based "conduits" to play US housing debt - has shrunk for 18 weeks in a row. It has shed $404bn or 36pc. As lenders refuse to roll over credit, banks must take these wrecks back on their books. There lies the rub.

Professor Spencer says capital ratios have fallen far below the 8 per cent minimum under Basel rules. "If they can't raise capital, they will have to shrink balance sheets," he said.

Tim Congdon, a banking historian at the London School of Economics, said the rot had seeped through the foundations of British lending.

Average equity capital has fallen to 3.2 per cent (nearer 2.5 per cent sans "goodwill"), compared with 5 per cent seven years ago. "How on earth did the Financial Services Authority let this happen?" he asks.

Worse, changes pushed through by Gordon Brown in 1998 have caused the de facto cash and liquid assets ratio to collapse from post-war levels above 30 per cent to near zero. "Brown hadn't got a clue what he was doing," he says.

The risk for Britain - as property buckles - is a twin banking and fiscal squeeze. The UK budget deficit is already 3 per cent of GDP at the peak of the economic cycle, shockingly out of line with its peers. America looks frugal by comparison.

Maastricht rules may force the Government to raise taxes or slash spending into a recession. This way lies crucifixion. The UK current account deficit was 5.7 per cent of GDP in the second quarter, the highest in half a century. Gordon Brown has disarmed us on every front.

In Europe, the ECB has its own distinct headache. Inflation is 3.1 per cent, the highest since monetary union. This is already enough to set off a political storm in Germany. A Dresdner poll found that 71 per cent of German women want the Deutschmark restored.

With Brünhilde fuming about Brot prices, the ECB has to watch its step. Frankfurt cannot easily cut rates to cushion the blow as housing bubbles pop across southern Europe. It must resort to tricks instead. Hence the half trillion gush last week at rates of 70bp below Euribor, a camouflaged move to help Spain.

The ECB's little secret is that it must never allow a Northern Rock failure in the eurozone because this would expose the reality that there is no EU treasury and no EU lender of last resort behind the system. Would German taxpayers foot the bill for a Spanish bail-out in the way that Kentish men and maids must foot the bill for Newcastle's Rock? Nobody knows. This is where eurozone solidarity stretches to snapping point. It is why the ECB has showered the system with liquidity from day one of this crisis.

Citigroup, Merrill Lynch, UBS, HSBC and others have stepped forward to reveal their losses. At some point, enough of the dirty linen will be on the line to let markets discern the shape of the debacle. We are not there yet.

Goldman Sachs caused shock last month when it predicted that total crunch losses would reach $500bn, leading to a $2 trillion contraction in lending as bank multiples kick into reverse. This already seems humdrum.

Where will it end? A fresh study by Morgan Stanley warns that the big banks face a further $200bn of defaults in commercial property. On it goes.

The International Monetary Fund still predicts blistering global growth of 5 per cent next year. If so, markets should roar back to life in January, as though the crunch were but a nightmare. There again, the credit soufflé may be hard to raise a second time.

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