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The Economy When Debt Is Everywhere

Bob Chapman
International Forecaster
Thursday, August 26, 2010

Debt is everywhere and it certainly is onerous. We all have heard about the sovereign debt crisis, the debt of Greece and the debts of Ireland, Spain, Portugal and Italy. During that process the euro fell from $1.50 to $1.187; which gave euro zone exporters quite an advantage. The euro has since rebounded to a high of $1.33 and for now settled in near $1.28. Business confidence is back, but in the meantime the next course of action is to be higher taxes and austerity. Even consumers believe things are not going to improve. They all probably see the advantages of a cheaper euro. Even the CDS premiums have disappeared, which means at least for now the crisis has been arrested with a Band-Aid called loans – loans that will take these countries years to repay accompanied by years of depression. As a result, Greece is on the edge of revolt.

As a result of austerity, imposed on Greece by its Illuminist led government, unemployment has hit 70% in some places. The country’s budget deficit has been reduced by 40%, truly draconian. Spending by government has been cut 10%, which is more than double what the EU and IMF has required. Bankruptcies abound and purchasing power and consumption have plunged. Consequently GDP has fallen 1.5% in the past quarter and tax revenue has fallen off a cliff. Companies, particularly in Perama and Piraeus still are sending ships to other locations for repairs, because Greek wage costs are still too high. In this world of free trade and globalization the cheapest wage gets the business. That means Greeks are going to have to work harder if they want employment. Experts say GDP will fall 4% this year, which will be severe, with 17% of shops in Athens already filing for bankruptcy.

Instead of this madness Greece’s leadership should have cut government spending by 30%, lowered taxes, defaulted fully or partially on their debt, left the euro and returned to a lower valued drachma. Now they’ll be in depression for years paying off bankers whose loans and bond purchases were professionally ill advised and the funds were created out of thin air.

These measures have the country in depression and there is no light at the end of the tunnel, as bankers clamor for their money. The worst is yet to come as bigger layoffs begin and prices on everything skyrocket.

Greece is on the edge of revolution and well it should be. This IMF imposed tyranny should never have been imposed in the manner in which it has been, crudely.

We haven’t seen the end of the Greek and euro crisis by a long shot and there is a good chance the reaction to such problems could easily spread to Spain, Portugal, Ireland and Italy.

Several months ago in Greece’s largest newspaper, as well as on Greek radio and television, we predicted these results and what is to follow. The answer is to get rid of your false leadership that is selling you into IMF servitude that will last for decades. Like Spain was a military training ground for Germany in the 1930s in preparation for WWII, Greece is being used as a training ground for world economic and financial subjugation as planned by the forces of darkness in its quest for total world domination.

The one-world creators of the euro are aghast at the path five of the 16 members have followed and particularly Greece. As we predicted ten years ago Greece and Italy should have never been allowed into the euro zone because they had cooked their books with the assistance of Goldman Sachs and JPMorgan Chase. One interest rate can never fit all and you cannot have a monetary zone until you have a EU constitution voted for by the people.

Now Greek PM George Papandreou, Bilderberger and Illuminists, has invited Tommaso Padoa-Schioppa, one of the founding fathers of the euro to advise the country on its debt management. This certainly is by design, so that Greece will do exactly as Europe’s Illuminists want them to do, and, of course, the IMF as well. The question is how much more debt will be piled onto Greece’s shoulders to bail out European bankers? The first loan was for $141 billion and Greece’s ten-year bonds’ yields are still four times those of Germanys.

There is presently a giant sales job being used on the Greek people to accept Mr. Padoa-Schioppa as their savior. And, of course, a great deal is being made of the fact that he is saving Greece at his own expense – pro bono. We can assure your Europe’s elitists will make sure he is well compensated.

Ten-year Greek Treasury bonds yield 10.6%, whereas Germany’s ten-year bunds yield 2.27%, that is a difference of 8.33%. There is good reason for the giant gap. In fact Greece has never met Maastricht guidelines of public debt of 3% of GDP. No matter how you look at it Greece is headed for default and that was obvious from the beginning. All they are doing is piling on more debt. Default, total or partial, is the only solution. In that process the euro has to be abandoned.

There are those who believe the EU and the IMF have brought Greece time. That may be true, but the cost is depression that might last 30 years and the sale of Greek assets to pay back lenders, all of which will be sold to vulture elitists at $0.30 on the dollar. We also believe that within three years Greece’s debt will be $435 billion. How can Greece service that debt when they cannot service their present debt? That will put Greece into perpetual servitude to the bankers.

The euro and the EU have been failures in our estimation and now the Greek government calls in Mr. Padoa-Schioppa who crafted this failure.

This Padoa-Schioppa is little less than a sherpa, bureaucrat for European elitists.

What this is all about is saving Greece and the euro zone. In that process Ireland, Portugal, Spain and Italy along with Greece will be neutralized by unpayable debt. The elitists who run Europe know that such events could destroy the EU and they cannot let that happen.

As a result of Greece’s problems in the last five months to May, HSBC has lost 8% of their entire deposit base. The country is in dire financial straights, so there has been a flight of capital. As a result Greek lenders have had to borrow $123 billion in July alone. Portugal, Ireland and Spain have been big borrowers as well. In addition all these countries have falling tax revenue.

We have said from the beginning that Greece and its co-members are all in a death spiral. Austerity is not the only answer. Default is part of that equation.

Twenty countries are headed into bankruptcy and more will follow. That brings up the subject of state debt in the US. America has been in an inflationary depression for 18 months. States have been cutting back for two years, but the budget gaps are still there. The struggle continues as states continue layoffs and cuts. 2011 will be a terrible year and 80% of states expect deficits of more than $200 billion. 2012 looks even worse.

Federal aid could be close to being over, which means further cuts. This means those hit by the depression will lose vital services, and that will further negatively affect the economy. The combined deficits for this year and next could be as high as $300 billion. That means even more cuts and it also makes 2011 a more difficult year than 2010. Worse yet, there is no recovery and there never has been. That was $2.5 trillion created most of which ended up in the casino halls known as international markets. Those who expect tax revenues to rise and unemployment to fall will be very disappointed. We have to laugh at Treasury Secretary Geithner’s comments that the recovery is underway. As soon as he is done at Treasury he should apply for one of the cheerleading jobs at CNBC. Next we await his comments on the perfect head and shoulders technical formation, and breakdown, regarding the Dow and the USDX. The latter is the dollar index. That formation is the worst and denotes deep downside activity. At the moment the states are immediately in more trouble than the federal government.

There has been no relief from unemployment. The U3 may say 9-5/8%, but U6 is 16-5/8% and if you subtract the birth/death ratio, which is a fraud, you get 21-1/2%. This past week the numbers worsened. How can tax revenues rise with so many unemployed?

As unemployment worsens demand for social services, food stamps and Medicaid increases. 69-1/2% of GDP comes from consumers. How can growth occur when household wealth is diminishing? Not to speak of tax increases of 15% next year that our President and his party have promised us as wages and purchasing power fall. Then there will be an attempt to raid retirement benefits by government exchanging those benefits for government guaranteed annuities from an all but bankrupt government. Then there is the behind the scenes discussion for a national transaction tax of 1%. Does it get any worse? You wanted change, and you got it. If you do not throw all these incumbents out of office in November you are doomed. Someone has to tell us how these factors spell recovery.

34 states have announced deficits for 2011. These are doozies. They are the total shortfall as a percentage of the full year 2011 budget. Here are the worst: Nevada 54%; 41.5% from Illinois: New Jersey 38.3%; Arizona 36.6%; North Carolina 30.3%; Utah 30.2%; Connecticut 28.9%; Georgia 26.2%; Minnesota 26%; South Carolina 25.6%; Wisconsin 23.9%; California and Colorado at 21.6% and Florida at 20.2%.

For 2012 the worst are Illinois 52.3%; New York 37.3%; Nevada 36.7%; Mississippi 27.6%; California 25.7% and Minnesota 25%. How is that for incompetence? And, these numbers are going to get worse.

30 states have raised taxes, which could eventually lead to tax revolt. This leads as well to less service and less overall demand, less business and profits, which deepens the downturn. This is truly the worst of all worlds and it is nowhere near over. The federal government supplies about 40% of shortfalls, most of it for Medicaid – the rest goes into a state fund. Some of this assistance to some states ends this year and some by mid next year. Residents can then expect more service cuts and higher taxes. That will reduce GDP and cost perhaps 1 million jobs.

There you have it. This is the direction in which the states are headed. They made no preparations and are essentially buried. Next the administration intends to force pension and retirement plans to buy government securities and to fund federal work projects. This is like in Greece and in other European countries – this is the nightmare of all nightmares.

Last week the Dow fell 0.9%; S&P 0.7%; the Russell 2000 rose 0.2% and the Nasdaq 100 added 0.4%. Cyclicals lost 0.8%; transports added 0.2%; consumers fell 1.3%; utilities dipped 0.6%. High tech rose 2.2%; semis 1.6%; Internets rose 3.5% and biotechs fell 0.6%. gold bullion rose $12.00, the HUI gained 3.2% and the USDX rose 0.1% to 83.01.

Two year T-bills fell 2.5 bps to 0.485%, 10-year notes fell 6 bps to 2.62% and 10-year German bunds fell 12 bps to 2.27%.

Freddie Mac’s 30-year fixed rate mortgages fell 2 bps to 3.90%, one-year ARMs were unchanged at 3.53%, 15’s fell 2 bps to 3.90% and 30-year jumbos were unchanged at 5.37%.

Federal reserve credit fell $6.5 billion, up $82.6 billion YTD, or 5.9% annualized. Fed foreign holdings of Treasuries and Agencies jumped $11.4 billion to a record of $3.176 trillion. Custody holdings for foreign central banks have increased $221 billion YTD, or 11.8%, and YOY 12.9%.

M2, narrow money supply, rose $8.3 billion to $8.644. it is up $132 billion YTD, or 2.5% annualized, and YOY is 2.7%.

Total money market fund assets rose $4.1 billion to $2.826 trillion.

Nationalizing the U.S. mortgage- finance system would turn taxpayers into servants of the ‘housing investment and debt complex,’ according to David Stockman, a former head of the Office of Management and Budget.  This shift would complete a transformation that started during the 1970s, when federal housing subsidies were expanded, Stockman wrote… ‘All principled political opposition to Pimco-style crony capitalism has been extinguished,’ wrote Stockman, a senior managing director at Heartland Industrial Partners. ‘Indeed, the magnitude of the burden already created is staggering.’

July existing home sales were 3.83 million vs. the expert’s estimate of 4.67 million, as June was revised to 5.26 million from 5.37 million. That is the worst results since LBJ was in office. A 27% plunge from July and off 25% from July 2009.

The Richmond Fed Manufacturing Index fell to 11 in August from 16 in July.

Influential bond trader Bill Gross called on U.S. policymakers to implement a nationwide refinancing scheme that he argued will provide of a boost to the economy of between $50 billion to $60 billion.  In prepared remarks during a panel discussion to begin the Obama administration’s conference on the future of housing finance, Gross said he favors the consolidation of all the housing finance agencies into a single public entity fully backed by the government.  He said policymakers should quickly re-engineer a refinancing opportunity for all borrowers that are current with their payments and are included in the GSE’s securitized mortgages PIMCO’s proposal to introduce refinancing opportunities on a large scale, Gross said — where 5%, 6% and 7% mortgages are turned into 4% mortgages — will provide a stimulus of $50 billion to $60 billion in consumption as well as a potential lift of 5% to 10% in terms of housing prices. PIMCO also advocates a 100% public housing finance system, Gross said.

Demand for loans at the majority of lenders in the U.S. failed to rise last quarter even as banks eased standards for the first time since the credit crisis began, a Federal Reserve survey showed.  Banks eased standards and most terms on loans to businesses of all sizes. The Fed described the change as ‘a modest unwinding of the widespread tightening that occurred over the past few years.’ Credit standards for small firms were loosened for the first time since late 2006.

Taxpayers must cover at least a third of a $3 trillion bill for public employee pensions even if lawmakers eliminate cost-of-living increases and raise the retirement age, according to an academic study.  ‘Even if states uniformly eliminated generous early retirement deals and raised the retirement age to 74, the unfunded liability for promises already made would still be more than $1 trillion,’ Joshua D. Rauh, associate professor of finance at Northwestern University’s Kellogg Schoo said.

What deflation? Food prices jumped 3.9% in July according to the hokey CPI. They should be substantially higher in coming months.

Record increases in the price of food have kept the rate of inflation above 3pc…The average household will be hit hard and, although many branded goods companies have been able to absorb rising input costs, basics have increased dramatically, according to our own measure of inflation, the Real Cost of Living Index.

Fruit prices have risen by 10pc, fish is up 8pc, vegetables 5pc, while bread and cereal prices have risen by 3pc.

http://www.telegraph.co.uk/finance/personalfinance/investing/7955733/10-ways-to-profit-from-food-inflation.html

For years we have cited St. Louis Fed research that states ‘food inflation’ is a great predictor of future inflation. And food inflation in Asia, the economic engine of the world, is soaring. Deflation, according to academics and grand poobahs, is a decline in the general price level. This is not occurring in the USA.

As we keep averring, there is deflation of assets, income and living standards while most necessities of life are inflating. So US citizens are being squeezed because deflation of assets and inflation of necessities can coincide.

Inflation comes through the door and wisdom flies out of the window There’s no mystery about our inflationary problems – but to solve them we need to face up to some harsh realities.

CPI inflation has exceeded the Bank of England’s 2pc target for 43 of the past 52 months. The CPI remained at 3.1pc in July – forcing the Bank to pen yet another letter of explanatio. In the latest, released last week, Bank Governor Mervyn King invoked the spectre not of falling prices, but of 1970s- style price rises, warning of the dangers of “destructive high inflation”.

The Obama administration is grappling over how much to force private lenders to pay for apartments and homes for the poor as it presses ahead with a major overhaul of the government’s housing policy, officials said.

One option under consideration is simply to require mortgage lenders to provide a portion of their loans to affordable housing, essentially putting the burden on the private sector. Another idea being discussed is to put the onus on government agencies such as the Federal Housing Administration, which makes loans to borrowers who cannot afford to make a standard down payment.

A third choice would be a hybrid of private and public participation. For instance, the government could make private firms pay a fee into a federally administered fund that would subsidize affordable housing.

Anyone that asserts, or asserted over the past few years, that ‘we’re trying to save capitalism’ is either ignorant or deceitful. What solons are trying to save is the US welfare state.

This is why the US economy & financial system is comatose. The requisite restructuring of the economy and financial system would entail market-based solutions and not more government. This, of course, is anathema to liberals and crony capitalists – because they believe they know better than the market.

Businesses may have to start putting leases on their balance-sheets – WHEN you lease something you agree to pay for it bit by bit over time. So it is like incurring a debt, say the International Accounting Standards Board (IASB) and America’s Financial Accounting Standards Board (FASB). Therefore, it should be on your balance-sheet. This new rule, proposed on August 17th by the two regulators, has shocked companies everywhere. It is up for public comment until December, but could be enacted as soon as June next year.

Today, companies can opt either for a “capital lease”, which goes on the balance-sheet, or an “operating lease”, which does not. By labeling leases as “operating”, firms can appear less indebted than they really are a survey by PricewaterhouseCoopers, an accounting firm, found that it would add about 58% to the average company’s interest-bearing debt.

The American Banker: Reserve Releases Increasingly ‘Ridiculous’

Ask any prudential regulator if it is too soon for banks to be releasing loan-loss reserves, and the answer would be “Yes.” Make that, “Hell, yes.”

And yet in the second quarter, the biggest banks beefed up earnings by draining reserves.

“If you believe capital is too low, then this is sort of ridiculous,” said Bob Eisenbeis, a former Atlanta

Fed official who is now the chief monetary economist at Cumberland Advisors.

Interestingly, Tim Long, the chief national bank examiner at the Office of the Comptroller of the Currency, used the same word during an interview on the topic.

“For accountants to go in and say, ‘Well the recession is over, and now we want you to start making negative provisions,’ I think that is just absolutely ridiculous,” Long said. “We have got to get this loan- loss model fixed because every time we go into a recession we have the same thing.”

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