Budget Deficit

"All this money printing, massive debt, and reckless deficit spending – and we have 2% inflation? I'm beginning to believe that either the deflationists are right, or the Fed's interventions are working." While a low CPI may be puzzling in the midst of massive, global currency abuse, there are three realities about inflation that convince us it's not only coming, but will catch an unsuspecting citizenry off guard. Let's take a look at why we're convinced inflation will be one of the next big catalysts for the gold price...

Succinctly summarizing the positive and negative news, data, and market events of the week...

Back in December 2011, Europe swooned and bond yields soared when it was shocked, shocked, to learn that Spain had been lying about its budget deficit all year, a number which was subsequently hiked several more times. Then in 2012, to keep up with the pretense that things are better, Spain once again did what it does best: fudged numbers, this time desperate to make it appear that its actual government deficit was better than expected because one had to 'obviously' exclude all those items that are not part of the government spending... like payments for its broke provinces, or indirect funding for its broke banks. Now it turns out that in addition to fudging the definition of "budget", Spain was, surprise surprise, lying once again. From Bloomberg: "The Spanish government said its 2012 budget deficit will be bigger than first estimated after the European Union requested changes in how tax claims are computed. The budget shortfall excluding aid to the banking sector was 6.98 percent of gross domestic product last year, more than the 6.74 percent predicted on Feb. 28, Deputy Budget Minister Marta Fernandez Curras told reporters in Madrid today. That compares with 8.96 percent in 2011."

The hallmark of human nature is adaptability.  Faced with a changing environment, the human spirit and its social manifestations change in response.  But once the human endeavor itself creates the environment, how can such adaptation be a simple exercise in instinct?  Simply put, it cannot. Throughout all of this crisis, the global elites have displayed consistently worsening signs of decadence, psychopathic tendencies, and overall detachment from reality.  And who can blame them?  There has been no tap on the shoulder, no knock on the door, no raid on the office to indicate that anything is seriously wrong. Such is the contemporary reality we live in.  People try to live their lives, to avert their eyes, to hide their children from the sight and effect of the monstrous cavorting of the elites. Perhaps a crazed fad for frugality will break out and suppress the urges of the elites.  In the meantime, hide your valuables as well as you can, and treat your children with the sympathy they deserve.  They are among the chief victims of our era’s unholy orgies of risk and corruption.  Frugality or fragility?  The choice is yours, as well as theirs.

• Euro zone call notes reveal extent of alarm over Cyprus (Reuters)
• Stagnant Japan Rolls Dice on New Era of Easy Money (WSJ)
• Cyprus, European data batters shares and euro (Reuters)
• UK cuts taxes to revive stagnant economy (FT)
• "Quality Control" Rat Body Linked to Blackout at Fukushima (NYT)
• North Korea issues fresh threat to U.S., South probes hacking (Reuters)
• South Korea Says Chinese Code Used in Computer Attack (BBG)
• Osborne paves way for Carney to retool Bank of England (Reuters)
• Carney Gets ‘Escape Velocity’ Mandate With Limiter (BBG)
• Osborne Pledges Five More Years of U.K. Austerity (BBG)
• Bernanke Saying He’s Dispensable Suggests Tenure Ending (BBG)
• Senate Passes Bill to Fund Operations (WSJ)

We present readers with a pop quiz: the chart below show the ratio of total financial assets to host nation GDP. The tragic cases of Cyprus and Iceland are well-known, as per Reuters, and highlighted on the chart. We urge readers to guess what the supposedly very stable countries X and Y are on the chart, whose total financial system assets to GDP are approaching those of Cyprus, especially since depositors in their banking systems may be due for a very unpleasant surprise next if indeed Iceland and now Cyprus are the case studies.

As part of its 2013 budget, the UK announced something quite dramatic - a government-funded housing subsidy. The government will to commit GBP 3.5 billion of capital spending over the next three years to shared equity loans. The Loans will be up to 20% of the value of a new-build home. The government will also offer mortgage guarantee to lenders to help them provide more loans to people who can’t afford big deposits. Guarantees will be sufficient to support GBP130b of mortgages, Osborne says. "These guaranteed mortgages will be available to all homeowners, subject to the usual checks on responsible lending,” Osborne says.

Here is a quick overview of what is going on. Besides reviewing the key developments, we explain why the EU Summit, which is not attracting much attention, is in fact important.

While the people of France voted for a wealth distributing tax-the-rich Socialist President, it appears Francois Hollande is not living up to his electorate's hope for change as his policies are increasingly seen as simply more of the same as Sarkozy - “often the line is very fine between the two but Hollande must maintain the idea that he is more left wing.” Hollande’s popularity fell in February, leaving him the most unpopular French leader since 1981, a TNS-Sofres poll showed. More than two-thirds of the French and 44% of those who voted for him say they’re disappointed with him. It seems Socialism is not all it's cracked up to be as "the [European] obligation to cut deficits and spending and make reforms... exactly what Sarkozy had to deal with... annuls all measures Hollande wants to impose to boost jobs and growth." Hollande has restated his promise to reverse the unemployment trend and chanted his three mantras "constancy, endurance and hope," but, as Bloomberg notes, the last five opinion surveys have been disastrous for the self-proclaimed 'normal' president but have no fear as the 'old fuddy-duddy' is going back to the people in a charm offensive.

A few observations about growth and policy backdrop that is shaping the investment climate. It is a large overview that may be helpful to start the week.

Much virtual ink has been spilled over the decline of the mainstream media, measured by circulation, advertising revenue, or a general sense of irrelevance. Furthermore, news consumers increasingly recognize that the mainstream media outlets are basically public relations services for government agencies, large companies, and other influential organizations. Journalists do very little actual journalism — independent investigation, analysis, reporting. A news outlet that deviates from the Narrative by doing its own investigation or offering its own interpretation risks being cut off from the flow of anonymous briefings which means a loss of prestige and a lower status. In exchange for sticking to the Narrative, they get access to official sources. Give up one, you lose the other. Readers are beginning to recognize this, and they don’t want to pay. Nowhere is this situation more apparent than the mainstream reporting on budget sequestration.

Venezuela is a place of severe contradictions. It’s the only country we found that ranked in the top ten regarding improvement in the UN Human Development Index since 2006, and also ranked in the top ten regarding intentional homicides per capita. Usually, these two things do not go together. Similarly, income inequality has been reduced, but has been accompanied by very high inflation. Chavez’ redistribution policies contributed to a large decline in Venezuela’s Gini coefficient since 2002, now the lowest in the region (lower implies less income inequality). However, Venezuela has also experienced the highest inflation in the world over the last 5 years (excluding Zimbabwe, of course), which suggests that Venezuelans have in part been made more equal by having their incomes inflated away. Despite all the challenges, Venezuela’s economic model may well survive given how high oil prices are; but, what no one knows is how much hard currency the government needs to spend to maintain support from the Chavistas.

The France-based ratings agency has just joined China's Dagong, and US Moody's by Fitch-slapping Italy with a BBB ratings handle. Citing four main reasons: election results which and 'non-conducive' for further structural reforms, deeper than expected recession, greater than expected budget deficits, and a weak government less able to respond to shocks. But apart from all that, as we noted earlier, Italian stocks and bonds are bid.

If Friday and yesterday it was Europe's reporting of ugly and below expectation economic data that pushed US stock futures ultimately higher, today it will be Europe's modest economic data beats that will send futures, where else, higher, and result in the Dow Jones breaking its nominal all time highs at the open or shortly thereafter. Following the Chinese economic update in its State of the Union address, which as we reported earlier, saw China set more moderate growth targets for itself resulting in the SHCOMP nearly wiping out Monday's losses, it was Europe's turn to shine which it did following the report of various Service PMI, which unlike last week's horrible manufacturing PMI data, were better than expected with the natural exception of Spain which printed at 44.7, well below the January 47.0, the first drop since September driven by the sharpest job losses since March of 2009, and Italy which dropped from 43.9 to 43.6, same as expected. The core countries' Services PMI beat: France coming at 43.7, on expectation of an unchanged print from last month's 42.7, and Germany printing at 54.7 vs also an expectation of an unchanged 54.1. Not very surprisingly, however, it was not the EURUSD which benefited the most from this data, which has lost nearly 50 pips from its overnight highs following the better economic news, but the various equity futures which have one centrally-planned goal: to take out all time DJIA highs or else, and unless something changes in the next three hours, precisely this will happen.

The most notable overnight event was the release of the Chinese Government Work Report as part of the annual meeting of the National People's Congress which kicked off today and runs until March 17. This is the Chinese equivalent of the US State of the Union address, delivered in this case by the outgoing premier Wen Jiabao. In it, Wen summarized his administration’s achievement in the past ten years in some detail, but still voiced a sense of crisis when talking about existing social and economic problems. The key highlights were the closely watched economic targets for 2013, which while not surprising, were at the lowest levels in the past decade, confirming that the Chinese slowdown in both economic and loan growth is likely here to stay as the economy downshifts from its mercantilist approach, even while pesky inflation pressures persist.