While we can only hope the following screed posted in an otherwise serious BusinessWeek, by David Kemper, CEO of Commerce Bankshare, and more importantly, a former president of the Federal Advisory Council of the Federal Reserve and thus indicative of the kind of "advice" the Fed receives, is a joke we have a very nagging feeling that the text below is actually serious. Which is why instead of Friday humor, we have decided to err on the side of caution and call this segment Friday tragicomedy. Because with a statement such as the following: "Why not expand the Fed balance sheet exponentially, from its current $3 trillion to $33 trillion... Would $30 trillion in extra buying power be inflationary when our entire current GDP is only about $15 trillion? Maybe, maybe not—but we need a game-changer here. First let’s celebrate the Fed’s record profits and its contribution to reducing our deficit. Then let’s seize the moment to do something truly grand: eliminate that stubborn deficit. We have the tools, and I, for one, say let’s give it a try."... it shows that the idiotic trillion dollar coin, Sheila Bair's farcical suggestion to let every American borrow $10 million from the Fed at zero rates, or even our suggestion from a year ago that the government build a Death Star, may appear as sheer genius in comparison to what else the Fed may be considering, and implement, before all this is said and done.
The Keynesian belief that the government can print/ borrow and spend enough money to trigger self-sustaining prosperity is a nonsensical, magical-thinking Cargo Cult. The following charts show why it will continue to fail, with eventually catastrophic results: the returns on this unprecedented borrow-spend policy are diminishing to near-zero or negative. As long as the interest rate on debt is low, the path of least resistance is to keep borrowing to support politically untouchable fiefdoms, cartels and constituencies. Eventually, the cost of servicing the debt overwhelms the diminishing returns on the debt-based spending.
According to “Economics 101”, quantitative easing, on the heroic scale we have witnessed thus far, should already have led to rampant if not hyper inflation. That it hasn’t is down to the continuing decline in the velocity of circulation of money. In simple terms the banks aren’t lending (compared with the amount of money available to them), but instead are punting on financial assets, which is where “inflation” is ending up and benefitting their balance sheets. Markets generally front run the economy, but if, as many folk believe, including our commentator above, that quantitative easing has been a failure from the start, then why are equity markets indicating an upturn in economic activity? At the end of the day, if the central banks continue to believe they have no other option than money printing and you can put up with the volatility, it’s all aboard the equity train. Bond yields won’t rise much either; if at all. The gold price should give some indication of whether this strategy is working or not, but that is a market that is far easier to rig than sovereign debt – the Germans seem to think so as they contemplate repatriating some of their bullion held by other central banks.
Keynesian stimulus policies (deficit spending and low-interest easy money) create speculative credit bubbles. The U.S. economy is a neofeudal debt-serf wasteland with few opportunities for organic (non-Central Planning) expansion. The velocity of money is in free-fall, and borrowing, squandering and printing trillions of dollars to prop up a diminishing-return Status Quo won't reverse that historic collapse. Put another way: we've run out of speculative credit bubbles to exploit.
Geithner Unleashed: Sends Letter To Boehner, Warns Even Brief Default Would Be "Terribly Damaging", Channels ReaganSubmitted by Tyler Durden on 01/14/2013 18:02 -0400
Following up on today's relentless debt ceiling propaganda, which started with the Politico report that more than half of republicans are willing to push the US into a "temporary" default, going through Obama's "We are not a deadbeat nation", but one whose president apparently will not debate the debt ceiling (the same president who as a Senator was against rising the debt ceiling) and closing with Boehner's rebuttal to Obama, saying the GOP would raise the debt ceiling but in exchange for spending cuts, sure enough it was time to unleash the Treasury Secretary in his last days on the job, toting the party line ("extending borrowing authority does not increase government spending; it simply allows the Treasury to pay for expenditures Congress has previously approved") making it "abundantly clear" that "Even a temporary default with a brief interruption in payments that Congress subsequently restores would be terribly damaging, calling into question the willingness of Congress to uphold America’s longstanding commitment to meet the obligations of the nation in full and on time. It should also be noted that default would increase our borrowing costs and damage economic growth and therefore add to future budget deficits, not decrease them." The unleashed Geithner then proceeds to threaten: "Threatening to undermine our creditworthiness is no less irresponsible than threatening to undermine the rule of law, and no more legitimate than any other common demand for ransom." Finally, Geithner also made it clear that the CNBC "RISE ABOVE THE DEBT CEILING" campaign is now at T-30 to T-45: "Treasury currently expects to exhaust these extraordinary measures between mid-February and early March of this year" which however should not be news to anyone.
If anybody should be labeled a lunatic, it should be the Democrats and those that are encouraging these unsound financial spending policies.
The U.S. federal deficit is now exceeding $1 trillion dollars every year —up from $161 billion in 2007, the last year before the financial crisis. Spending is up some $1 trillion, as outlays for Social Security, Medicare, Medicaid and other entitlements have increased by an amount equal to the entire 2013 military budget – a budget which may again surpass the combined military expenditure of every other nation in the world. U.S. unfunded liabilities are now estimated at between $50 trillion and $100 trillion and by the end of the decade (in less than just 7 years), runaway entitlement spending will require shutting down the military or crippling many other vital domestic spending programs to head off massive deficits that will likely lead to a dollar crisis and significant inflation. No matter what deal is eventually agreed, whether before or after the new year, it will at best nibble at the edges of the trillion dollar annual deficits that are being piled up. While all the focus has been on the so called U.S. ‘fiscal cliff’, amnesia has taken hold and many market participants have forgotten about the far from resolved Eurozone debt crisis – not to mention looming debt crisis in the UK and Japan.
We know its not Paulson, Ackman, or SAC; is it Dalio's Bridgewater? No, the world's most profitable private entity that is in business to generate profits via speculation in financial markets is, drum roll please, the Federal Reserve. Stone & McCarthy (SMRA) estimates the Fed will make around $90bn profits in 2012. Of this around $87.5bn will be remitted to the US Treasury - a new record high (quite helpful when one is trying to avoid a debt ceiling using 'extraordinary measures' though we assume this is already penciled in due to its consistency). Since 1947 the Federal Reserve has paid the Treasury roundly $975 bln, about 1/3 of which has been paid over the past 6 years. In other words, the cumulative Federal deficit since 1947 has been reduced by nearly $1 trillion since 1947 due to the repatriation of Fed earnings to the Treasury Department. SMRA estimates that this profitability, thanks to the spread between SOMA coupon income and IOER will likely lift the Fed's profitability to around $120bn in 2013, but a 1% rise in yields would translate into a $275bn loss.
When Tim Geithner announced an hour ago that the US debt ceiling will officially be "risen above" on December 31, he stated that there are approximately two months in which the Treasury can take emergency measures to delay the actual debt ceiling breach, a moment in time which we believe will take place some time in March. Upon further reflection, with the automatic spending cuts and tax hikes that will take place on January 1, the irony is that the debt ceiling extension may last materially longer due to a substantial reduction in the US budget deficit, potentially pushing the final threshold to as late April or even May which means the political theater is going to last for even longer than we expected - something which both parties now appear set to capitalize on as much as possible. So the question now is what are the options before Tim Geithner and what are the "emergency measures" the Treasury take to delay the inevitable moment when one of three things happens: i) the US hikes its ceiling, ii) the US begins living within its means, iii) the US defaults on its debt. Since the third, and certainly second are impossible, and since the debt ceiling theater is something we all lived through as recently as 2011, here is the article we penned in January 2011, when that long ago debt ceiling of a mere $14.3 trillion was about to be breached, and whose ultimate rise required a 20% market plunge together with an S&P downgrade of the then pristine US AAA rating (an event which Tim Geithner had said shortly prior there is no risk of ever occuring), answering precisely this question.
Facing reality is positive. That's the upside to the fiscal cliff. The last decade's fantasy that we could borrow our way to prosperity while lowering taxes on upper-income earners (because it's so cheap to borrow trillions at near-zero interest rates) is finally running into reality-based resistance.
The rumor mill on unnamed sources and strawmen is full tonight with Reuters, Bloomberg, and WaPo all reporting on a new new deal from Obama that 'meets the Republicans more than halfway' apparently. The crux appears to be a $1.2tn tax increase (over 10 years of course) thanks to higher rates on households earning over $400k (up from his original $250k but below Boehner's $1mm) and $930bn in spending reductions, including the much-discussed 'accounting' gimmick of cost-of-living-adjustments (and unChained CPI - see below) in Social Security. The offer also has a 'debt ceiling' proviso to increase the borrowing capability for two years via McConnell's proposal. S&P futures got a lift from this great 'austerity' news (that will perplex the Keynesians) but seemingly got most of the excitement out of the way this afternoon.
US leaders see that this strategy has worked for EU leaders (those who went along with it are still in office, those who didn’t have been kicked out). And so they are now adopting a similar strategy with discussions on the fiscal cliff.
The Dow plunged 313 points yesterday, but don’t believe news media reports that it was the nearness of the “fiscal cliff” that caused the selloff. What spooked investors is a bigger picture that recognizes the economically catastrophic implications of a second Obama term. To be clear, there is nothing Romney could have done to avoid the deflationary Depression that lies ahead. However, a Romney presidency might have at least served as a reality check on malfeasant fiscal practices, delaying the onslaught of hard times for perhaps long enough to allow Americans to put their financial houses in better order before austerity is imposed on us with the force of an earthquake, as it has been on Europe.
"Capitalists seem almost uninterested in Capitalism" is how Clayton Christensen describes the paradox of our recovery-less recovery. In an excellent NYTimes Op-ed, the father of the Innovator's Dilemma comments that "America today is in a macroeconomic paradox that we might call the capitalist’s dilemma." Business and investors are drowning in Fed-sponsored liquidity (theoretically, capital fuels capitalism) but are endowed with what he calls the Doctrine of New Finance - where short-termist profitability guides entrepreneurs away from investments that can create real economic growth. We are trying to solve the wrong problem. Our approach to higher education is exacerbating our problems. There is a solution, it's complicated, but Christensen offers three ideas to seed the discussion.
Since it would appear that QEternity has ostensibly failed in its main goal of pushing the stock market higher (and mortgage rates lower), the White House seems to be scrambling. Obama administration officials have concluded that the economy, while improved (apparently), is still fragile enough to warrant another bout of stimulus. The same old kitchen sink is being thrown at the problem as they are now resorting to the same fiscal stimulus that has also failed time and time again (as we noted here). As WaPo strawmans reports the White House is discussing the idea of a tax cut that it believes will lift American's take-home pay and boost a still-struggling economy (citing people familiar with the administration's thinking). This is Keynesian-based Einsteinian madness at its very best.