Prepare NOW: They "Get It"

Anyone who doesn't believe that "they" (the powers that be) "get it" at this point needs to remove their head from their ass:

G-20 central bankers and finance ministers agreed in a joint statement today that “within their capacity, countries will expand domestic sources of growth.” At the same time, European Central Bank President Jean-Claude Trichet told reporters that Europe’s best contribution to the global rebound is to achieve fiscal sustainability.

Those two are polar opposites. You just heard Trichet admit that what everyone wants they cannot have.

Look folks, if you currently spend 11% of GDP by borrowing money and blowing into the economy to prop it up and you achieve "fiscal sustainability" (defined as not doing that any more) GDP will inevitably contract by the amount of stimulative borrowing you withdraw.

Geithner said at a press briefing today that “credible commitments to fiscal sustainability over the medium term” are needed to generate a durable recovery. Spain’s Finance Minister Elena Salgado said at a separate European press briefing that deficit reduction should come “no later than 2011.”

Game's up folks - that's six months out.

Let's be straight with everyone here. These are the current deficit additions for the first five months of 2010 (click for a larger copy):

That's nearly $700 billion in five months. Annualized it's $1.68 trillion. Last year's total was $1.647 trillion.

Ignore the CBO and other government claims. That which is borrowed is that which is owed, and the increase in that which is owed over a year's time is the true deficit in the budget, irrespective of all claims otherwise.

This comes out to roughly 12% of GDP. If we contract that deficit spending in 2011 to the European standard of no more than 3% of GDP then either GDP contracts by the difference (8-9%) or the government extracts that from you in the form of taxes.

Either way you don't have it - it is either not produced and thus not paid or it is produced and stolen. Irrespective of how it is achieved you are going to see roughly 10% of your "standard of living" come out of your hide.

It would be nice if it stopped there, but it both won't and can't. That which you don't have you can't spend, which means that the "excess capacity" in the economy goes up, not down. Employment will not increase, it will stagnate or get worse. Budgets will have to be slashed at state, local and federal levels - like it or not.

Rather than you taking it in the chute what should happen is what I described in my last post - that is, the fraudsters and scammers in the banking and "finance" industry who sold you, and the nation, on the premise of ever-increasing debt being sustainable, should be the ones who are put out of business at the same time.

Unless we the people demand that this happen it of course will not. The consequences of such a refusal will be profound and extraordinarily unpleasant, while those who caused this mess by their intentional and willful acts will continue to keep their ill-gotten gains.

Remember one thing folks - political promises are not debts. They have no standing in the line other than the willingness and ability to fund them. When that disappears, and it will, you will discover that the so-called "promises" you were made have the value of used toilet paper.

This is unavoidable, and no amount of bleating will change it. I wish there was a solution to this problem, but there is not. The promises made cannot be kept, not due to lack of political will but inability to continue to compound debt upon debt upon debt any longer.

We entered this downturn because people could not pay the debts they owed. We are still in this mess because people still cannot pay. The government attempted to shift those debts to itself, and now it is in danger of being unable to pay.

The Federal Reserve Z1 will be out on the 10th, and I will be updating the charts showing total systemic debt on that day. I expect they will continue to show contraction, despite the efforts of government to stimulate credit demand and thus continue the expansion.

That is the end game that leads to the Mises-style "adjustment" and there is nothing that can be done to prevent it.

The government has spent two years trying to stop the contraction by replacing private credit demand with public. The attempt to re-ignite private credit growth has failed, exactly as I expected it to and have repeatedly stated it would here on these pages.

All that has happened is that governments have now started to be unable to meet their debt commitments - so instead of businesses (and banks) going under, we now have the risk of governments going under.

The idiots in Washington DC and indeed around the world refused to recognize that they are the gnat on the horse's ass. If you look at the above chart you can see it clearly - Federal Debt is a small fraction of the total in the system. It is therefore mathematically impossible for The Federal Government to supplant and replace private credit demand and ability to pay. Something that is 20% of the whole cannot support the whole - it's that simple.

The sustainable long-run percentage of debt in the system is about half of what is now present. If we were to shrink "financial instruments" and "non-financial business credit" by 60% and household credit by about half we'd be in the upper part of the sustainable range.

That's where we're headed - whether we like it or not - as the government is reaching the end of its ability to prop this thing up.

The knock-on effects to GDP that will engender will be hideous. Just to go back to 2000's GDP would knock forty percent off. To return to a sustainable debt ratio on a $10 trillion GDP would require us to contract credit outstanding by some 55% - and that would put us at the top of the range.

I said when I began writing The Ticker that had we taken our medicine in 2001 we would have had to suffer a mild Depression - a 10-12% correction to GDP. In 2007, we would have had to suffer a 20% correction to GDP - roughly equivalent to The Great Depression of the 1930s.

I also said that if the government did what they've now done, the damage could easily be twice that bad, with a potential 40% decline in GDP in the cards.

Is there a guarantee that things will get that bad? No. But is it entirely possible? Yes, and if you believe not and want to expound on that in public you need to explain how your scenario can come about, given the clear mathematical evidence.

NY TIMES ARTICLE ABOUT FED RESERVE/US PROBLEMS IN CONVINCING CHINA TO "REVALUE" ITS CURRENCY

May 24, 2010

Clinton and Geithner Face Hurdles in China Talks

By MARK LANDLER

BEIJING — China and the United States opened three days of high-level meetings here on Monday meant to broaden and deepen the ties between the world’s largest developed and developing economies.

But the opening session instead laid bare a recurring theme between Beijing and Washington: the United States came with a long wish list for China on both economic and security issues, while China mostly wants to be left alone to pursue policies that are turning it into an economic superpower.

President Hu Jintao, welcoming the 200-strong American delegation in the Great Hall of the People, praised the “mutually beneficial and win-win cooperation” between the United States and China. Such coordination, he said, had helped speed the recovery from the 2008financial crisis.

On the crucial issue of China revaluing its currency — something the Obama administration had pushed for — Mr. Hu repeated China’s past promises to make its effectively fixed exchange rate respond more to the market, but the fact that the country’s top leader mentioned reform at all suggested it is on the leadership’s agenda.

Still, Mr. Hu also repeated that Beijing would move “under the principle of independent decision-making, controllability, and gradual progress.” Translation: China alone will determine the timing of any such move.

Economists said the deepening debt crisis in Greece, which came up immediately in the discussions on Monday, would make Beijing more reluctant to allow its currency to appreciate in value in the immediate future.

Treasury Secretary Timothy F. Geithner did not mention China’s currency in his opening remarks, and the United States did not broach it in the first working session. The administration has decided not to prod Beijing at this meeting, officials said, concluding that it would resist outside pressure.

The United States is hitting similar hurdles on security issues. Secretary of State Hillary Rodham Clinton pressed China to support measures against North Korea following the strong evidence that it torpedoed a South Korean warship in March. But China has been skeptical of North Korea’s role and is reluctant to punish the North, with which it has close ties.

And while China agreed to a watered-down United Nations resolution on Iran’s nuclear program, it has not signed off on amendments against specific Iranian citizens and companies. With big planned investments in Iran’s oil and gas industry, China may well be in business with some of them.

In her speech to the opening session, Mrs. Clinton cited Iran and North Korea as issues in which Beijing and Washington must find common cause. “Today, we face another serious challenge provoked by the sinking of the South Korean ship,” she said. “So we must work together, again, to address this challenge and advance our shared objectives of peace and stability.”

A spokesman for the Foreign Ministry, Ma Zhaoxu, was noncommittal, saying of the Korea crisis, “We hope all the relevant parties will exercise restraint and remain cool-headed.”

Some of this is cultural, to be sure. Chinese officials tend to speak far less directly than Americans. Mr. Hu did not mention Iran and North Korea, referring to regional “hot spots.” The fact that he frankly addressed the exchange rate of China’s currency, the renminbi, surprised some observers, and lent itself to varying interpretations.

For some experts, Mr. Hu’s pledge to “steadily advance the reform mechanism of the RMB exchange rate,” without repeating his previous references to the rate being “basically stable,” was a sign of conciliation. “It’s important, the fact they haven’t mentioned it,” said Ben Simpfendorfer, the China economist for the Royal Bank of Scotland.

But others interpreted it as a pre-emptive move to take the issue off the table. Eswar Prasad, an economist at Cornell University, noted that the crisis in Greece had rattled the Chinese on two levels. It was likely to curb their exports to Europe, and it had strengthened the renminbi relative to the swooning euro, which makes Chinese goods more costly in foreign markets.

“That double hit on China’s exports almost certainly means that they’re not going to move forward unless there is evidence of stabilization in the euro and stabilization in Europe’s recovery,” Mr. Prasad said.

A senior Chinese official said that Beijing would keep a “high alert and attention on the euro zone sovereign debt crisis.” He noted that it could affect not only Europe’s economic recovery but also Chinese exports. China exports more to the European Union than to the United States.

The United States needed a 48-vehicle motorcade to ferry its delegation to this second round of the so-called strategic and economic dialogue. Among the prominent names: the chairman of the Federal Reserve, Ben S. Bernanke, the commander of the military’s Pacific Command, Adm. Robert F. Willard, and the secretary of health and human services, Kathleen Sebelius.

Some of the topics under discussion veered far from economics and security. Mrs. Clinton singled out Melanne Verveer, the State Department’s ambassador at large for women’s issues, who is meeting with Chinese women’s groups to discuss their progress in women’s rights.

Mr. Geithner lobbied against Chinese government procurement rules giving preference to products with intellectual property developed in China. American businesses, particularly in technology, say this handicaps them and deprives China of state-of-the-art products. “Innovation flourishes best when markets are open, competition is fair, and strong protections exist for ideas and inventions,” he said.

The Chinese have their pet issues as well: Beijing is pushing Washington to loosen controls on exports of high-technology equipment with potential military applications. A raft of questions from reporters for state-run Chinese media organizations suggested a coordinated campaign.

If American officials seemed likely to leave China with many of their wishes unfulfilled, there was one notable difference in this year’s meeting compared to the one last year in Washington: the American economy is growing again, which gave Mr. Geithner a rare chance to crow a bit.

Rather than identify the United States with the troubled economies of Europe, Mr. Geithner said the United States was holding its own with emerging economies like Brazil, India, and China.

“Economic growth in the U.S. and China is broader and stronger than many had anticipated, even a few months ago,” he said.

Michael Wines contributed reporting from Beijing, and Keith Bradsher from Hong Kong.

BERNANKE BACK AS HEAD OF FED RESERVE FOR ANOTHER 4 YEARS

January 29, 2010

Senate, Weakly, Backs New Term for Bernanke

By SEWELL CHAN

WASHINGTON — The Senate gave Ben S. Bernanke a second four-year term as the head of the Federal Reserve on Thursday after critics excoriated the central bank’s conduct in the years leading up to the financial crisis.

The 70-to-30 vote was the weakest endorsement ever extended to a chairman in the Fed’s 96-year history.

The confirmation was a victory for President Obama, who had called Mr. Bernanke an architect of the recovery, but also signaled the extent to which the Fed, once little known to the public, has become the object of outrage over high unemployment and bank bailouts.

In several hours of debate, senators said that the Fed had abetted, then ignored, the housing and credit bubbles and allowed banks to keep dangerously low capital reserves and to make reckless lending decisions that ruined consumers. Some even blamed Mr. Bernanke for the falling dollar and questioned his commitment to free enterprise.

In contrast, Mr. Bernanke’s supporters were muted. They reiterated that the Fed had made mistakes but said that Mr. Bernanke had helped save the economy from a far worse recession.

After a week in which top White House officials and Mr. Bernanke met with Democratic leaders in the Senate to secure support, the Senate first voted 77 to 23 to end debate, with more than the 60 votes needed to overcome the threat of a filibuster.

On a second vote, to confirm, the 30 dissents came from 18 Republicans, 11 Democrats and one independent, Bernard Sanders of Vermont.

On Thursday evening, Mr. Obama congratulated Mr. Bernanke in a statement. “As the nation continues to face the consequences of the worst recession in a generation, Ben Bernanke has provided wisdom and steady leadership in the midst of the financial and economic crisis,” he said.

While an arm-twisting campaign by the administration limited the opposition, the outcry against the Fed will most likely continue rippling through economic policy generally, and Mr. Bernanke’s leadership of the Fed in particular. The effects could be felt first in the debate over how to reform financial regulations. The Obama administration has proposed consolidating risk regulation under the Fed, while some in Congress want to strip away its oversight authority.

“The institutional prestige of the Fed, even apart from this vote, had taken a hit, and it started back around the disaster of September 2008,” said Stephen H. Axilrod, who worked at the Fed for 34 years and wrote a history of its monetary policies. “I don’t think it has recovered. This is a low point in the Fed’s recent history, that’s for sure.”

The vote also made clear Congress’s insistence on transparency from a historically secretive institution that has made extraordinary interventions in the market since 2008.

“The Fed is going to have to work hard, for a long period, to regain the public confidence of the sort it enjoyed during the halcyon days when everything was going so swimmingly,” said Barry Eichengreen, professor of economics and political science at the University of California, Berkeley.

Senators from opposite ends of the spectrum formed unlikely alliances. After Mr. Sanders, who calls himself a socialist, finished denouncing Mr. Bernanke, Jeff Sessions, a conservative Republican from Alabama, rose to do the same.

Another Alabaman, Richard C. Shelby, the top Republican on the banking committee, which approved the nomination last month by a 16-to-7 vote, laid out a bill of particulars, saying Mr. Bernanke’s handling of the financial crisis did not make up for his failings before that time.

“Considerable economic devastation occurred as a result of Chairman Bernanke’s loose monetary policy and weak regulatory oversight,” Mr. Shelby said. “If we don’t hold Chairman Bernanke accountable, what precedent are we setting for future regulators?”

To an extent, the rhetoric against Mr. Bernanke reflected a spilling-over of frustration at two of his collaborators: the former Treasury secretary, Henry M. Paulson Jr., and the current one, Timothy F. Geithner.

And looming over it all was the role of Mr. Bernanke’s predecessor, Alan Greenspan, whose once-sterling reputation has been diminished as his decisions to keep interest rates low after the 2001 recession have been brought into question.

Mr. Bernanke, 56, was a member of the Fed’s board for part of that period, from 2002 to 2005, when President George W. Bush named him to lead his Council of Economic Advisers. He rejoined the Fed, as chairman, in 2006, and Mr. Obama renominated him last year. Mr. Bernanke is a Republican economist and an authority on the Depression.

“I knew that he would continue the legacy of Alan Greenspan, and I was right,” said Senator Jim Bunning, Republican of Kentucky, who was the lone vote against Mr. Bernanke in 2005.

Mr. Bunning cited a half-dozen statements from 2007 to 2009 in which Mr. Bernanke expressed optimism about the housing market, bank capital ratios, the capitalization of Fannie Mae and Freddie Mac and the unemployment rate. Saying that Mr. Bernanke had been repeatedly wrong, he declared, “We shouldn’t be paying the Fed chairman to learn on the job.”

Senator Sheldon Whitehouse, Democrat of Rhode Island, echoed that, saying Mr. Bernanke had shown “a troubling pattern of false confidence.” Senator Jeff Merkley, Democrat of Oregon, went further, saying the Fed had “helped set the fire that destroyed our economy.”

While less passionate, supporters of Mr. Bernanke said he had acted deftly and decisively, at least since the collapse of Lehman Brothers in September 2008.

“He basically allowed the Fed to become the lender of the nation,” said Senator Judd Gregg, Republican of New Hampshire. “Nobody had ever done that. The way he did it was extraordinary in its creativity, and the results were that the country’s financial system did not collapse.”