Congressional Budget Outlook :: CBO

Posted on January 7, 2009 by TheGauntlett

Hold your hats folks as here are some of the forecasts for 2009 (link):

GDP falling by 2.2%
Slow recovery in 2010
> 9% unemployment by 2010
Decline in inflation (hmmmm… if monetary policy says anything this will reverse or at least eventually destroy the dollar)
Continued decline in housing prices
Decline in real consumption of more than 1%
Indeterminate on the financial system

And the best of all

$1.2 trillion dollar budget deficit for 2009*

*That doesn’t include the proposed stimulus package
*That amounts to 8.3% of GDP

So, we have an economy in decline, and digging a deeper and deeper hole to climb out of. What I really want to know is how are we going to pay for 1) a 1.2T dollar deficit, and 2) a large fiscal stimulus package of a indeterminate size.

Let’s see our foreign friends have been purchasing our debt, which enabled us to essentially live off of their productive labor. China for example is seeing a marjor reduction in exports, its economy is contracting, and eventually it is going to have to decide if it is worth supporting the American lifestyle at their own expense. Presently, everyone is so intertwined I think there is a fear that if one jumps the house of cards falls down and we all lose. However, is it possible for say China to pull out of the house of cards with minimal damage? Is there a way they can reduce their exposure to US debt, and not have their savings collapse? This is something I’d really like to know.

Seems to me that if they slowly shift some of their dollar reserves into commodities and other currencies SLOWLY, especially when there is increased demand they will be able to lessen their exposure. The US import market is tanking, and has been tanking. With unemployment increasing Bloomberg people are going to have a smaller income and will be forces to save thus hurting exporting countries. This isn’t a US phenomena alone as Europe and frankly the rest of the world is contracting simultaneously, while being fed a mouthful of credit from central banks to re-inflate the bubble. Last I checked it is very difficult to inflate a popped bubble.

Let’s take the latest number from Taiwan Bloomberg. Their exports dropped by a record 41.9%. We all know that Taiwan exports electronics, which have been a major boon ever since the technological revolution, which also saw a major hiccuup in 2000-2003. So, this is confirmation of a major exporting taking a major hit. There will be ramifications for the Taiwanese economy.

I can’t imagine that after the dust settles the world’s economies will look the same. The sea of money will shift to where is sees the most opportunity and in its movement will tear apart the economies of many.

Here are a few more headlines on Bloomberg alone that tell a um telling story:

Fed Revives Discussion of Inflation Target to Counter Risk of Price Slide

ECB Expanded Balance Sheet by 36 Percent Last Year to Revive Bank Lending

Apartment Rents Fall, Vacancies Rise to Four-Year High on U.S. Job Losses

Shopping Center Vacancies in U.S. Approach 10-Year High as Stores Fail

Procter & Gamble Fights to Refinance as U.S. Borrowings Reach $2 Trillion

U.S. Banks Will Need to Raise More Cash in 2009, Meredith Whitney Writes

I’ll leave it at that, but what I’m seeing is RECESSION coupled with the Fed trying to stave it off through any means necessary, which is now including outright purchases of securities on the open markets. Again we have no savings and are either monetizing debt or borrowing it from somewhere. To do this will be disastrous to the dollar and our reputation as a solid financial center of the world. Sure there are plenty of other economies in dire situations, but in the end who will come out with the heads up high and who will come out still in the sand?

Banks are lending — NOT

Posted on October 22, 2008 by TheGauntlett

The theory was beautiful (well in the abstract)…

Give troubled banks more credit and they will lend it out and the economy will stop its free-fall. Now, that sounds like utopia to me. Create credit and we will all be saved for unemployement, slowing production, decreased consumer spending, and rising interest rates.

HOLD ON… let’s put a toe back on the plane of reality…

Banks aren’t lending much more than before eventhough they are being handed gobs of cash. Why wouldn’t banks lend out free money?

What if…

there aren’t any borrowers worthy of getting loans? — Let’s say during a recession! Oh right the economy slows WAY… DOWN.
there are more troubled banks and unknowns on banks balance sheets.
banks are holding the cash knowing full well that there is another storm on the horizon

I didn’t pull this out of thin air like the Fed does with money. An article in the NY Times starts with

The banks aren’t lending. And despite what you have heard, they probably won’t start just yet.

Sorry Paulson your plan isn’t working.

“Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital,” Mr. Paulson said in a statement Monday. “And we expect them to do so, as increased confidence will lead to increased lending. This increased lending will benefit the U.S. economy and the American people.

Of course, with a $250 billion injection into America’s biggest banks — not all of which were troubled — Mr. Paulson has a political sales job to do. And no requirements to lend were attached to the money. (Some banks may use the money to buy others.)

But Mr. Paulson is making a big assumption about confidence, because until the real economy recovers — which could take more than a year — lending to Main Street is unlikely to return rapidly to normal levels.

“It doesn’t matter how much Hank Paulson gives us,” said an influential senior official at a big bank that received money from the government, “no one is going to lend a nickel until the economy turns.” The official added: “Who are we going to lend money to?” before repeating an old saw about banking: “Only people who don’t need it.”

Again banks don’t want to lend into a very uncertain future. They want confidence in the economy — there isn’t any and the opposite is occurring. People are spending less as they become more concerned about the safety of their jobs. Most Americans have no savings cushion to fall back on.

Roger Bootle and Jonathan Loynes of Capital Economics in London wrote a sobering note on Monday about the cash infusions into European banks that may apply here as well. “We expect rising loan defaults and further asset write-offs over the next couple of years to practically wipe out the governments’ capital injections, leaving banks back at square one,” they said. “Given that banks will need to increase their capital in order to expand their lending book, these measures on their own are unlikely to prevent bank lending from stagnating.”

Wait a minute… all that money being put into the system to restore confidence and spur lending may just vanish? So at the end of the day more banks fail, the economy continues to contract, available credit continues to contract, unemployment rises, and interest rates eventually rise. This isn’t what Paulson sold to us with his bailout plan. Were we duped?

Nah, the individuals responsible for the government’s actions are always in need of votes and making a horrible situation look not so bad or at least feasible to fix. At the end of the day our failed bailouts will have a disastrous effect. The consequences are a HUGE debt burden, a larger interest payment on that debt, the world losing confidence in the value of the dollar, and a prolonged recession probably followed by major inflation. I’ve been singing this song for a while and it will take time to play out, but as you can see this is a VERY rocky road.

Look both ways before crossing the street

Posted on October 21, 2008 by TheGauntlett

I received an email from a friend and here is my response. You ought to be able to decipher what the questions were about. These are my opinions of the present situation, and are by no means recommendations.

—-
1) Voting for McCain…

I really don’t think voting for A or B is going to matter. I’m voting for Ron Paul because I believe that change has to come from going against the herd. I refuse to be partially responsible for either of them being in office.

The odds are in favor of the democrats getting into office and taking over Congress. I’m actually a bit frightened by this, but either situation is grim. Hopefully it will be better than the last 8 years.

2) Deflation / Inflation
This is tricky and something I’ve been trying to better understand. There are many many many factors at work here. We are headed into a MAJOR recession… thus your cutting spending was a wonderful idea. A recession is a drag on the stock market. Many think that after a brief rally it is going to drop much further. I know you are invested at the moment. One way to hedge against a drop is to invest in a inverse ETF fund such as SDS, QID, DXD, or TWM (these are leveraged 2x FYI). These ETFs have saved me much pain. The overall trend in the market is down. Bear market rallies tend to be severe and swift to the upside, while the markets overall continue to decline.

As for Deflation and Inflation what this means is a decrease or increase in the money supply. Generally during inflation when the Fed is creating money prices of everything goes up because there is a surplus of money that has to go somewhere. When the money supply contracts either by the Fed reducing the money supply or debt is paid off. Then prices decrease. However, under a fiat monetary system credit and continued inflation are essential to keep it up. At the moment with the Fed creating TONS of money we are looking at the potential for hyperinflation in the future, which nobody wants. So, the Fed is walking a tightrope between deflation and inflation. I imagine they will lean towards inflation over deflation ultimately. At the moment we are primarily seeing deflation as prices are coming down everywhere (commodities, housing, stocks).

During deflation the market will come down as will all prices. I think that regardless the markets will continue their descent due to the upcoming recession, decrease in consumer spending, decrease in imports and exports, and increase in unemployment. Once the recession takes hold and the effects of the monetary inflation occurring now start to be felt we will probably start to see increases in commodity prices across the board.b With companies facing difficult times I don’t foresee the created money moving into equity markets.

3) War with Iran
The conflict between Iran and Israel is heating up. I received a report that said Israel won’t be doing anything until after the election, but who knows. In this case we would see the value of gold skyrocket, oil go through the roof, and the dollar go through the floor. This is slowly moving from a remote to more plausible reality. I hope this doesn’t happen as the US can’t afford to be involved in another conflict. We are already spread so thin. Because of this and the enormous debt load the US government (its citizens) now carries I fear for the support and longevity of the dollar. At this point I think it important to own some gold and have some money invested in foreign currencies. <Thank you Gary North and Chris Martenson> These are for the long-term and may lose significantly in the short term. There are many uncertainties at the moment.

Oh and least I forget… At this juncture in the Republicans and Democrats are but different sides of the same coin.

America FOR SALE… Foreclosed?

Posted on October 14, 2008 by TheGauntlett

United States for SALE

The United States’ Commerce Department’s Bureau of Economic Analysis (BEA) will stop publishing a key report tracking foreign direct investments (FDI) into the U.S. Through the discontinuation of the BEA’s “New Investment Series,” the U.S. government and the American public will no longer be able to distinguish between FDI used to acquire existing U.S. assets from FDI used to establish new U.S. businesses.

-Article Link

I really want to be surprised that we will no longer be able to view how many of our assets are being sold off to foreign countries. Before we know it we are going to be owned by everyone else. Imagine… the once wealthiest and powerful nation in the wold was auctioned slowly auctioned off to foreign bidders, and hardly anyone said a thing.

We no longer are able to track the actual amount of currency in circulation via the M3 indicator, and now this. Soon we won’t even have the M1 and M2 figures to look at, which would enable even more credit expansion because nobody could question what the Fed is doing.

This is looking more and more like a systematic power grab by banking institutions. Let’s see who ends up surviving the carnage in the years to come.

Look at the Fed Goooooooooooooooooooooo

Posted on October 7, 2008 by TheGauntlett

I found this on www.chrismartenson.com and couldn’t resist posting it here especially after my post about the dollar. How the dollar is going to survive after this much cash is pushed into the system I really don’t know. A inflationary depression seems to be looking more and more likely. It would explain why gold is so scarce on the physical market. People are losing faith in fiat currency and want hard currency that has some store of value. Paper is easily printed, and as Voltaire said

“Paper money eventually returns to its intrinsic value – zero”

Is it just me or is that line going almost STRAIGHT up. If that isn’t a sign of complete and utter panic well I don’t know what is. They are going to put as much liquidity into the system as possible. Will this mean that you house will go back up in value? Perhaps, but your purchasing power will decline severely. Jim Rogers said the US currency is doomed, and I agree. It is only a matter of when, and not if.

The US Dollar gaining? What?

Posted on October 7, 2008 by TheGauntlett

Hyperinflation, inflation, deflation, depression, recession, stagflation… well which is it? I have no clue, but there is a massive monetary inflation occurring, and a looming recession. Hmmm so does this mean a inflationary depression? Yikes.

Last week I took a break from overwhelming myself about the markets and the state of the economy. The timing wasn’t perfect, but I had personal reasons.

Before I start on the quest of exploring our present situation of the potententional…”ion”s I want to make sure we are on the same page. Therefore lets have a defining moment:

Money: Easily exchangeable, is relatively scarce, and is a store of value.

Inflation: An increase in the money supply
Deflation: A decrease in the money supply
Hyperinflation: A self-perpetuating unstoppable (more or less) state of inflation
Recession: A significant decline in business activity, mainly a contraction in the economy or slowing of growth
Depression: A long-term economic state characterized by unemployment and low prices and low levels of trade and investment
Stagflation: A period of time characterized by high inflation and recessionary conditions.

I’ve been looking at calls for the vaious scenarios and needed some clarification as to what happens in the various situations. For the most part it seems obvious, but I’ve been struggling with the increase in the value of the United States dollar. Our national debt is above 10 trillion and rising rapidly as the recent bailouts continue, and the most recent increase in military spending added another $612 billion that we have to pay for.

Why is the risk of deflation so frightening that the Fed, Treasury, governments, and foreign central banks will do anything to stave it off? Deflation is like the grim reaper knocking on your door for a fiat currency. A fiat currency survives on debt and inflation (credit expansion). Too much inflation and it can become worthless, and negative inflation (deflation) and it gains value. That sounds like a good thing but it isn’t. As the currency gains in value debt becomes more expensive, and thus more difficult to pay off. Imagine taking out a $100,000.00 loan with todays dollars and paying it off with dollars from 1930. Good luck! During deflation prices also fall due to the decrease in the money supply and as there is no longer credit being handed out for people to use to consume and invest. The whole system comes tumbling down and the reaper walks in the door to say hello!

When credit is created (a loan) that is an increase in the money supply, and when it is paid off that is a decrease in the money supply. Say the loan is $100.00. That is $100.00 of money put into existance with a very small percentage actually backing it. Now I repay my $100.00 loan and that credit is erased and the money supply contracts. This is the normal situation that occurs daily. However, if people don’t want to lend or borrow then we have a problem.

No credit means no ability to borrow, which means no abilty to purchase goods and services. Everything is based on debt today. The change began in 1913 with the Fed, and the ultimate shift to fiat money was in 1972 during the Nixon presidency when we abandoned the gold standard and thus savers were punished from that day forward.

Okay this leads to me to the strengthening of the United States Dollar… Why I ask is it getting stronger. Many argue that it is because Europe is weakening, which may be part of the picture. However, I read something that made a clear point that because European banks are required to hold dollars for various toxic debt they hold denominated in dollars they normally use the interbank markets based on the LIBOR rate. However, that market is seized up and nobody wants to lend so they start using the EUR / USD credit swap market. As they purchase dollars its value goes up. Notice today that the Euro gained against the dollar when the Fed decided to start purchasing short-term commercial paper. They are stepping in and becoming the new mainstay for that market: which one? EVERY MARKET <Interesting…>

And tomorrow is a new day!

Force FED chickens…

Posted on September 26, 2008 by TheGauntlett

Ironic that WaMu’s collapse happens to coincide perfectly with this bailout proposal trying to be hurriedly pushed through Congress. It will for sure pass now <that was my take last night><now we are seeing major hiccups in the process (thankfully)>. We have been sold out by various individuals in the United States Government. Very unfortunate indeed, and some say the greatest looting operation ever in history. Mark my word it isn’t over and will continue to spread to regional banks. I find it interesting that Goldman Sachs and JP Morgan are the golden children in this whole mess, not to mention that Paulson used to be CEO of Goldman. Coincidence?

In the EXTREME case you are going to want to have food and water on hand. A decent supply. I don’t know if it will get to that, but there is a lot of uncertainty in people’s minds. When they are fearful they do stupid things. Besides it never hurts to be prepared for an earthquake. I’m concerned about a run on the dollar starting abroad than at home.

Yes, I realize I sound like a doomsdayer, but I’m just taking a pragmatic approach to the whole thing. Show me some good news in this mess and I might be willing to alter my view slightly.
Has it occurred to you that we were fed the same crap with respect to going into Iraq about weapons of mass destruction? This administration has been credited with being stupid, but I’m starting to wonder if that was all a line. They have systematically destroyed the dollar, taken us to a never ending war – Iraq, allowed the credit bubble to get as big as it did, and in the end who gets to pay the bill? The taxpayer.

And I’ll now step off my soapbox

-T

And don’t forget about Voltaire!

“Paper money eventually returns to its intrinsic value – zero”

~ Voltaire – 1729

Fed inflating with no restraint – Hyperinflation?

Posted on September 25, 2008 by TheGauntlett

A picture is worth a trillion words…

Money Supply 09/25/2008

Frankly I’m not surprise to see what the Fed is doing and can only imagine what this is going to look like if this bailout goes through. There is a precedent throughout time that inflating the monetary supply only prolongs the inevitable. This is a sad state of affairs and I see only troubled times ahead for the once mighty dollar. Like the Romans who clipped their gold and silver coins the United States is creating more and more money from nothing. Why do we need a bailout package when we can just print money? It isn’t actually printed anymore, but issued through treasuries between the Fed, the Treasury, and private banks.

We are headed towards a recession if we aren’t already in one. Inflating the money supply while in a recession presumably means higher prices. The contraction in prices we recently saw was perhaps a byproduct of the Fed contracting the money supply, which it has now reversed course. During the Great Depression of 1929 many banks tried using their depositor’s money to help keep the market afloat just as the Fed is now doing… The outcome? You know what happened…

Now we are taking the opposite position and inflating. What happened to Rome… and thanks to Mike Hewitt at dollardaze.org he lists many countries plagued by hyperinflation.

Angola (1991-1999)
Argentina (1975-1991)
Austria (1921-1922)
Belarus (1994-2002)
Bolivia (1984-1986)
Brazil (1986-1994)
Bosnia-Herzegovina (1993)
Bulgaria (1991-1997)
Chile (1971-1973)
China (1939-1950)
Free City of Danzig (1923)
Ecuador (2000)
England
Greece (1944-1953)
France (1789-1797)
Georgia (1995)
Germany (1923-1924, 1945-1948)
Greece (1944-1953)
Hungary (1922-1924, 1944-1946)
Israel (1979-1985)
Japan (1944-1948)
Krajina (1993)
Madagascar (2004)
Mexico (2004)
Nicaragua (1987-1990)
Persian Empire (1294)
Peru (1984-1990)
Poland (1922-1924, 1990-1993)
Romania (2000-2005)
Ancient Rome
Russia (1921-1922, 1992-1994)
Taiwan (late-1940′s)
Turkey (1990′s)
Ukraine (1993-1995)
United States (1812-1814, 1861-1865)
Yap (late 1800′s)
Yugoslavia (1989-1994)
Zaire (1989-1996)
Zimbabwe (1999 – present)

The fiat money system that we presently have, which in its present form has only been in existence since 1971 when we went off the gold standard. To say that we have a precedent for what may or may not happen is incorrect. We are now in uncharted territory, however history has its lessons.

Copperfield & Houdini for Presidency!

Posted on September 22, 2008 by TheGauntlett

I’ve attended a few performances by David Copperfield and he has performed the unbelievable. Before my very own eyes a group of thirty people vanished into thin air. Where did they go? I watched the unbelievable made real right in front of me. How could this be an illusion created to fool me into belief? I ask you… HOW?

David Copperfield and Harry Houdini would probably be a better pair to run the government at this point. At least they would give us a good show. The current officials in office make my gut wrench. We have migrated from the land of the free to nationalization of private property in the name of free markets. Whoa… okay let’s get something straight. WE DO NOT HAVE FREE MARKETS… NOT EVEN CLOSE

If we actually had a system that represented free markets the Federal Reserve (a PRIVATE bank made up of member banks that are also PRIVATE) would not exist, we would still be on the gold standard, and the government wouldn’t even consider a bailout of the taxpayer’s funding, and the United States Treasury would not be proposing this amazing relief package for those who are mainly responsible for getting us into this mess.

So, I mentioned two masters of illusion… Why? What is being pulled off at the moment is happening in front of our eyes and for some like me is atrocious. However, for others they think it is essential to the integrity of financial markets, financial institutions, and YOUR house. The entire bailout is being purported as a bailout for the helpless homeowner, the saver, the middle class.

The problem is that nobody knows how much any of this debt is actually worth. Say the government buys $700,000,000,000,000.00 worth of debt at $0.20 on the dollar, which is great discount. If that debt is in reality worth less than that we have a problem. When will these notes be paid back, and in what form are the notes?

Chris Martenson managed to grab part of an article that later disappeared from Bloomberg that said:

“The Treasury’s thinking is to make it as big and wide as possible so they have the flexibility to act if need be,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about $108 billion. “There have been losses on a whole range of U.S. debts and as the economy deteriorates in response to the housing slump those losses could escalate.”

Treasury officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.

This effectively means any type of debt. Let’s take a moment to see what forms of debt exist:

Credit Card DEBT
Mortgage DEBT
Automobile DEBT
Bond DEBT

………. and the list goes on ………….

So, we have the United States government wanting to take on all this debt in the name of saving the financial markets. Let’s just take the debt from the banks to clear up their balance sheets so they don’t have to write it off, which would cause them to have to increase their reserves because their assets are now below the minimum. We could lower that further, but it has already been lowered to 3% of total assets. That means they most likely loaned out the other 97%.

As the Fed creates money our dollar is worth less and less. Where is the Federal Government going to come up with $700 Billion dollars? They will create it from nothing, which the Federal Reserve is great at doing. Inflation will not solve the problem, only exacerbate it. Newt Gingrich opposes it, and admits that if he is wrong in not supporting it that it is the lesser of two evils.

If this bill passes please say goodbye to the dollar as we know it. Foreigners might finally reach the breaking point to where they are afraid to purchase dollars and realize that buying them to keep their currency less expensive is futile.

Down with the dollar, manipulation everywhere….

Posted on September 18, 2008 by TheGauntlett

I don’t know what to think about today. There was nothing normal about how the markets went about their day. Up down up down waaaaay up. And exactly when the market took off gold dove. There was a perfect inverse correlation between the two markets.

When gold gets too high this isn’t good for banks and especially the fed. It is a signal of losing confidence on the dollar, which is a piece of monopoly money that we are able to use as a medium of exchange.

For the whole fiat currency to continue to function there has to be debt and liquidity. Liquidy is drying up as banks don’t want to lend to eachother. Nobody knows for sure who is the next in a series of falling dominoes. With the Fed injecting over 100billion dollars into the system last night our dollar is looking ripe for a major devaluation.

I’m off to Newport Beach today for a real estate seminar led by John Schaub. It should be interesting and I’m excited to learn something new and get my mind off the rapidly deteriorating economy.

Trevor Gauntlett

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