This what $5 Trillion has bought

47 percenters

WE ARE THE 47%: “A recent Gallup poll found that 47% of American households own a gun, up from 41% just a year ago.”

Let's see:

• 47 percent of American households own a firearm
   
• 47 percent of American adults pay no federal income tax at all.

Coincidence?

That figure of 47 percent paying no federal income tax dates from 2009, btw, and is almost certainly at or even over 50 percent now.

The "perfect storm" of bullishness - or not

By now everyone knows that market indices took off like bottle rockets this morning. The Dow, for example:

The reason is that the most important central banks in the world, including the US Fed, agreed to charge each other less interest in dollar swap lines beginning this coming Monday.

The U.S. Federal Reserve, the European Central Bank as well as the central banks of Canada, Britain, Japan and Switzerland agreed to lower the cost of existing dollar swap lines -- or reducing the cost of temporary dollar loans -- to banks by a half percentage point, starting December 5.

The central banks' actions was intended to ensure that starved European banks facing a credit crunch have enough funding as the euro zone's sovereign debt crisis worsens.

Also, China unexpectedly cut bank reserve requirements in hopes of boosting an economy running at its weakest pace since 2009.

Further encouraging investors, the latest economic data suggested the U.S. economy was moving more solidly toward recovery. The U.S. private sector added the most jobs in nearly a year in November, while business activity in the U.S. Midwest grew faster than expected in November surged.

Other data showed pending sales of existing U.S. homes surged in October by the most in nearly a year.

"There's a perfect storm of bullishness. PMI came out better than expected, plus what happened overseas, and ADP was well above consensus," said Donald Selkin, chief market strategist at National Securities in New York, with about $3 billion in assets under management.

It's true that the lates jobs report looks good. Even so, I think the surge will retreat - the move announced today has already weakened the dollar, resulting in higher prices of futures for oil, gold and silver, which are always priced internationally in dollars.

Furthermore, the other side of investment makers don't see what the big deal is:

S&P Equity Futures are up another 3 Percent, Bond Market Yawns

Global equities are sharply higher with this global coordinated action. S&P 500 futures are up another 3 percent and will gap higher.

Meanwhile Spanish 10-year bonds rallied (yields fell) a mere 7 basis points to 6.32%, Spanish 2-year bonds rallied a mere 8 basis points to 5.51%, Italian 10-year bonds rallied 10 basis points to 7.13%, and Italian 10-year bonds rallied 9 basis points to 7.00%.

Whatever the equity markets see, the bond market doesn't. A flight to safety of German bonds is back on, that China needs to cut reserve requirements is a huge sign of weakness (and no it will not stop a hard Chinese landing).

Also bear in mind that on September 15, there was coordinated swap-line action that did nothing.

Here is what happened to the ESI index after the September swap-line action:

The fact is that none of the underlying, weak fundamentals about the Eurozone's or America's economy have changed. The euro is as weak as ever and the dollar is weakening even more. Nothing about the PIIGS' situation is improved. So essentially, today's central banks' action place yet another temporary bandage on a suppurating wound. The markets are reacting to the news that something has been done, but by the beginning of next week, I think that the sane heads on Wall Street will understand that this something isn't amounting to much because basically, nothing has changed.

That's also the assessment of PIMCO's CEO, Mohamed El-Erian, who says that the indices moved so dramatically today because, "Risk markets love liquidity injections, real and perceived." Also,

First, these monetary institutions feel that, again, they have to move because other entities have continued to be too slow and too ineffective; and second, they feel that they cannot, and should not ignore an actual or anticipated need to relieve acute pressures within the banking system.

These two reasons were made even more pressing by last week’s dislocations in the functioning of European financial markets – most notably, the inversion of the Italian yield curve, pressure on government bond markets in core Europe, the growing fragility of the banking system, a drop in market liquidity, and growing hesitation by market participants to warehouse any risk.

The immediate impact on markets unambiguously favors risk assets across the world. The longer-term effect depends on the scale and scope of the follow through from others. This is particularly important as we count down to yet another European Summit on December 9.

The hope is that central banks are acting because, looking forward, they feel confident that other policymakers will finally catch up with a big and spreading debt crisis that has serious implications for growth, jobs and inequality. The fear is that they are acting because they feel that they must again pre-empt yet another set of potential disappointments.

The AP reports that all that happened today is that Europe has delayed "major debt decisions for 10 days." Will policymakers finally catch up to the markets and bankers? To think that is the triumph of hope over experience.

So: Near term: Party! Long term: Head for the hills!

Update, 1:45 p.m.: I predict that there will be a distinct pullback in the Dow by the time the NYSE closes at 4 p.m. today. At Close: Well, I called that the wrong way. The Dow actually closed at 12,029.56, up just under 474 points for the day. Things to look for: Yields on 10-year Italian bonds and the US Dollar Index. If the former drops about a point and the latter rises another three points or so, then the strong market indices will have a longer shelf life because together they will indicate that some sort of real response to the Eurozone's long-term issues has been adopted. But that is pretty problematical.

Brits: Prepare for riots in euro collapse

Prepare for riots in euro collapse, Foreign Office warns - Telegraph

British embassies in the eurozone have been told to draw up plans to help British expats through the collapse of the single currency, amid new fears for Italy and Spain. ...

If eurozone governments defaulted on their debts, the European banks that hold many of their bonds would risk collapse.

Some analysts say the shock waves of such an event would risk the collapse of the entire financial system, leaving banks unable to return money to retail depositors and destroying companies dependent on bank credit. ...

Some economists believe that at worst, the outright collapse of the euro could reduce GDP in its member-states by up to half and trigger mass unemployment.

Analysts at UBS, an investment bank earlier this year warned that the most extreme consequences of a break-up include risks to basic property rights and the threat of civil disorder.

“When the unemployment consequences are factored in, it is virtually impossible to consider a break-up scenario without some serious social consequences,” UBS said.

Markets move faster than politicians

Which is one big reason why the Euro crisis is not getting solved.

“Financial markets continue to move faster than politicians,” Mansoor Mohi-uddin, head of foreign exchange strategy for UBS, said. “Fixed income investors are betting that either Germany moves towards a fiscal union with its eurozone partners or that, without the ECB willing to buy unlimited amounts of sovereign bonds in the secondary markets, the eurozone will break apart.”

This gentleman also says that the end of the Euro as the single, unified European currency has already been priced into the markets. But I would add that the markets have not priced it in all the way.

However,

The EU process continues and the politicians clearly feel they have ample time on their hands.

EU monetary history is full of delays and Germany giving in to pressure. Merkel’s position is under pressure and the Bund Yield has become our barometer for pro-EU solutions – for now the trend is clear – we are on-route to Germany giving up and soon.

Europe: Apocalypse now?

Germany told to act to save Europe - FT.com:

Germany is the only country in Europe that can act to save the eurozone and the wider European Union from “a crisis of apocalyptic proportions”, the Polish foreign minister warned on Monday in a passionate call for more drastic action to prevent the collapse of the European monetary union.

The extraordinary appeal by Radoslaw Sikorski, delivered in the shadow of the Brandenburg Gate in the German capital, came as the Organisation for Economic Co-operation and Development called on European leaders to provide “credible and large enough firepower” to halt the sell-off in the eurozone sovereign debt market, or risk a severe recession.

The OECD’s comments came as the organisation slashed its half-yearly forecasts for growth in the world’s richest countries, warning that economic activity in Europe would grind to a near-halt.

If Europe does reach a financial apocalypse and economic activity there grinds to a near halt, the US will topple right behind. A third of the United States' trade is with Europe. Think we can take that kind of hit without crashing ourselves?

More: OECD: euro collapse would have 'highly devastating outcomes' worldwide

The collapse of the euro could send the world's advanced economies into a severe recession, dragging emerging markets with them into the mire, the Organisation for Economic Co-operation and Development warned on Monday. ... Pier Carlo Padoan, OECD chief economist, made plain in the body's latest six-monthly economic outlook that the greatest threat to global economic health comes from the eurozone rather than from the tax-and-spend gridlock in the US Congress. ... His comments came amidst evidence that the 17 eurozone countries are even wider apart on the measures required to staunch the exit of global investors and prevent a credit crunch on an even worse scale than in 2008-09.

This is Europe. The moment of verticality is only
days away. 

There simply is no good news from anyone writing about the Eurozone and its future. The SS Europe is sinking and everyone knows it. But the national governments cannot agree on how to stop it. There is some consensus that Germany has to "save Europe," but the fact is that Germany alone cannot do it.

They say that when a ship sinks and you find yourself in the water, you have to get away from the sinking vessel because the water rushing into the ship will drag you along with it. But there is no economy in the world that can "get away" from Europe's impending and by now almost certain collapse. The recession we entered in 2008 will be like a walk in the park to what is coming. It will be a true depression. Ironically, in the short term America's markets will benefit from an inflow of investors' cash as they run away from the collapsing Euro markets. But that won't last.

How long until the sinking European ship turns vertical? Perhaps less than two weeks.

Falling off the financial cliff

John Williams says that when it comes to inflation, you ain't seen nothing yet.

Severely slashing social programs such as Social Security and Medicare would be the only way it could be avoided. I don’t have any problem per se with Social Security or Medicare, but you can’t bring things into balance without addressing them. If you look at the U.S. annual deficit on a GAAP basis—generally accepted accounting principles—with accounting for the year-to-year change and the net present value of unfunded liabilities in Social Security, Medicare and such, you’re seeing a federal deficit in excess of $5 trillion per year.

Putting that in perspective, if you wanted to raise taxes, you could take 100% of people’s salaries and the government would still be in deficit. You could cut every penny of government spending, except for Social Security and Medicare, and you’d still be in deficit.

You can’t escape the eventual hyperinflation if those programs are not addressed. Originally, I was looking for hyperinflation by the end of this decade. I’ve advanced it to 2014, and it may well come before that. I think we’re already in the early stages of going through what has to happen for this to break.

I report, you decide. But those problems will not be addressed quickly, and probably not even addressed at all. The United States is presently financially suicidal.

Consider Spain, for example, which is now falling off the financial cliff.

Spain’s economy is double the size of Greece’s, Ireland’s and Portugal’s COMBINED.

Spain’s total debts, including mortgages and commercial loans, are large enough to bankrupt all of Europe.

Even if the United States manages to escape a direct contagion attack for a while longer, the impact of Spain’s demise ALONE will explode on global financial markets with a mega-tonnage that’s many times larger than anything we’ve seen so far from Greece.

Worst of all, Spain has simply run out of time. Its death spiral is under way; its plunge into default, virtually unavoidable.

Here are the horrifying facts …

Spain’s unemployment has skyrocketed to 22.6 percent; and among workers under 25, to an astronomical 48 percent!

At least one million people are at risk of losing their homes — the equivalent of nearly seven million people in the U.S.

Homelessness and begging are rampant; labor strikes and street protests, endemic.

And now, the final blow: Global bond investors are dumping Spanish bonds like a hot potato, driving Spain’s borrowing costs through the roof.

In fact, Spain is now having to pay three times as much on its three-month treasury bills than it paid only one month ago. Investment capital is fleeing Spain like proverbial rats and the sinking ship.

But it's not better here.

Almost everywhere in the world, especially in the United States and Europe, the pattern is clear:

First, the government spends everything it has.

Next, the government borrows all it can from its people.

Then, it borrows still more from foreign countries and banks.

Finally, the debts become so onerous that they bring on the contagion — the day of reckoning — we’re witnessing now.

Right now investor money is still coming into US markets because even though the game is crooked, it's the only game in town (or the world) that is still a safe haven. But it's only comparatively safe, and the comparison is like saying that a stage two lung cancer patient is healthy compared to a stage four patient.

I am not posting cheerful stuff here, I know. Jeepers, I sound like Jeremiah, but Jeremiah, for all his gloominess, turned out to be right.

It's going to get uglier

Quick embeds of three pieces at Business Insider that are more than merely disturbing. The trends are pretty ugly.







See also my earlier post, "The long decline is just beginning."

The long decline is just beginning

Here is a real bright ray of sunshine over at American Digest about The Ship of State:

The jobs are not coming back. To know that you need to get off the inter-states; off the scenic blue highways that lead to your summer beach retreats. You need to get into the towns that have been passed by; the towns whose main industry has become food stamps and "assistance." These towns are growing in number daily and will continue to grow.

There is no work in these towns. The factories that supported them are long dead or dying. They, like the people they supported, are carbon based life forms and the strange insects that govern us seem to be united in making sure they never return. The checks and the food stamps come, but that's not enough to paint the houses or put in the gardens or do much more than eat too many pizzas and drink too much watery beer. The young would leave but more and more there's no place to go. They spend their time instead deciding on what sort of new tattoo will go well with the previous twenty.

The building of new houses and malls and condos and other large construction projects are not coming back. And even if they did where would we find the workers trained to build them? Old carpenters have moved on to making a living at something other than construction. There's not enough work to bring young ones onto the job and help them to master the skills needed. When a nation stops building it stops having the jobs that can train the next generation of builders. Mexicans, working cheap and off the books, are still in some demand, but there's a limit to repainting and the kind of minor brickwork that makes for a pleasant garden.

The money isn't coming back except at something worth less with every passing day.

No, it is not, and here's the demographic-tsunami reason why.

There are 79 million baby boomers like me. The oldest boomers, born in 1946, have started turning 65 just this year and many are entering retirement. There are 17 years worth of boomers left to retire, on average, 4.3 million per year. (Actually, since boomer births did not peak until 1957, the number of boomers retiring will steadily rise by more than that average. Boomer births passed more than 4 million per year in 1954 and never fell below that number; 1965 was fewer than 4 million, but '65 was not a boomer birth year. See here.)

It will not be until 2025 when median boomer's age will be 70. But boomers' longevity will be years longer. That means that boomers' mortality rate will not start diminishing boomers' numbers significantly for several years, probably at least 10 years. Since for many years now the death rate per 1,000 population has been declining, the margin of error is wide in just when the number of boomers will start falling steeply, probably only when the median age has gone significantly higher than 70.

So: boomers are starting to retire and will do so in accelerating numbers for at least 18 more years - 1964's boomers (the last of the cohort) won't start to retire until 2029. We are living longer. And we are selfish people who are not very much inclined to leave a sizable estate to our kids. The huge wealth transfer we enjoyed from The Greatest Generation has been spent, boyo, because man, do we boomers love our lifestyles.

Don't expect a big inheritance from your boomer parents -- even if they are rich. Less than half of millionaire boomers say that leaving money for their kids is a priority for them, according to a 2011 U.S. Trust study. But 64% of boomers say they plan to use their money to travel and more than one in three say they want to use it to "have fun."

Now, where is all the money to pay for our retirement centers, medical care and vacations in Costa Rica going to come from? It will come from the equity investments we made before we retired. In short, we are going to sell stocks, bonds and mutual funds like crazy starting very soon. And because each successive year adds millions more to the retired ranks, the selloff will accelerate every year into the late 2030s and almost certainly well into the '40s.

The fate of traditional equity markets, beginning, oh,
next year. Found at Boomer Cafe.

The plain fact is that tens of trillions of dollars are going to disappear from the value of the DJIA and other stock indices over the next 20-30 years. And with each year, as the selloff accelerates, the decline in equity-companies' market value will drop even more - because each successive year, boomers will sell more equities than the year before, both as a group and individually, just to stay even.

In fact, if the near-term retiring boomers cash out only $1,500 of equities per month, starting with zero retired boomers and adding about 360,000 every month, then in only six months more than $3 trillion of sold-share value will be reached.

Read this slowly: Three. Trillion. Dollars. Sold off every six months. That's in addition to the previous semiannual's sum. That's $18 trillion of equities sold in just the first 18 months. And it only goes much higher from there. Folks, we are looking at possibly hundreds of trillions of dollars of equity sales over boomers' retirement years.

There are two huge problems with this. First, the total world market's valuation is only $37 trillion. So boomers' simply cannot cash out enough equities to maintain their standard of living because there is literally not enough money in the world to do it, assuming that boomers need only about $1,500 of sold principal per month to make up a shortfall of dividends and interest. Even if you halve the figure, the numbers can't be sustained.

So - we boomers simply are not, as a population group, going to enjoy in retirement the high standard of living we are accustomed to.

The second problem is that Generation X, boomers' successors, doesn't have nearly enough money to match as inflow into equities what we boomers are going to take out. Gen-X is the generation hit hardest by the multi-year Great Recession. Enormous numbers of them have already sold out just to stay afloat financially. And even before the recession hit, they were piling up debt like madmen.

The Gen Xers, generally defined as those born from 1965 through 1980 — now 27 to 43 years old — have even less assurance than the boomers of receiving company pensions and projected Social Security benefits.

In 1979, when the oldest Gen Xers were teenagers, the sole retirement plan for 62% of workers was a traditional pension, according to the Employee Benefit Research Institute (EBRI). By 2005, when most of the Gen Xers had joined the workforce, that number had flipped: 63% of employees found themselves covered only by voluntary 401(k) plans. So much for the corporate safety net.

On top of that, the Gen Xers' life expectancies, and thus their retirements, will likely exceed even the boomers'. They'll need to save more aggressively. Yet, burdened by high housing costs, stifling college debt, stagnating wages and outsize health insurance and gas prices, Gen Xers are saving too little for retirement, just as workplace benefits have shrunk.

According to the EBRI, more than one in three workers ages 35 to 44 aren't setting aside any money for retirement. Among those ages 25 to 34, 45% aren't saving.

In short, the traditional US equities markets - the Dow, the S & P and the NASDAQ - are heading over the falls and there is nothing they can do about it. Anyone younger than 50 today is going to get clobbered if they keep investing for retirement with the old "buy and hold" method of investing in funds or stocks.

The US economy is not coming back even to the 1980s level of performance, and as for that of the '90s and middle Oughts, only in your dreams.

What we boomers have done is left an incredibly bollixed up legacy to our children, and we captain the ship of state happily off the falls because, hey, we'll be dead by the time it crashes onto the rocks, so what's it matter? But our kids and grandkids will be crushed by what we have done. Fact is, we never grew up and we never will.

Say goodbye to the EU

The thing is that the European Union is doomed financially. And that means it is doomed politically. CNBC reports.

Christine Lagarde, head of the IMF, warned Europe's debt crisis risked plunging the global economy into a "lost decade," and said it was up to rich nations to shoulder the burden of restoring growth and confidence.

But the rich nations are only rich relatively, not absolutely. They are facing the same demographic and monetary challenges that the off-the-cliff countries have, but the rich nations are not as close to the cliff. But they are headed there and they know it. And there is no one to bail them out.

"Where do we find the angels?"

Milton Friedman tutors Phil Donohue in 1973. Milt speaks directly across the decades to exactly the issues troubling us today. This is the long version, more than 10 minutes. A 2-1/2 minute snippet is here.

My flirtation with Obamaism

Remember when then-candidate Barack Obama told Joe "the Plumber" that he wanted "to spread the wealth around?"

No. Really. You're kidding me. Barack Obama actually told that Joe the Plumber guy that he wants to "spread the wealth around." What, did Obama just get done reading the Wikipedia entry on Huey "Share the Wealth" Long or something? Was he somehow channeling that left-wing populist from the Depression? Talk about playing into the most extreme stereotype of your party, that it is infested with socialists.

And that quote is from USNews, which supported Obama in 2008 (today, not so much).

On Monday I had my own flirtation with Obamaism and did not even realize what I had done until later in the day. That day my wife and daughter and I ate lunch at a Chinese buffet that we had never dined at before. The chow was fine and the young lady attending our table did a great job.

Now, here's the rub. I almost never under-tip. For me to leave less than the full tip (runs 15 percent or so around these part) happens maybe twice per year, and then for only truly terrible table service. I over-tip if the service is above average. This lady's service was.

So I go to the counter to pay the bill and ask for and receive a discount for being retired military, not an uncommon thing around here. Feeling generous, I added the discounted amount to the tip.

Then later in the afternoon it hit me: that was Obamaism in action. I basically took money from the restaurant's owner when I asked for the discount and gave it to one of his employees. So in fact, I sacrificed nothing and walked out feeling good about my generosity. But I was generous with OPM - and that is exactly what the entire political class of our country is doing to you and me.

I have learned a lesson here. But our government never does.

Endnote: Us Congressman Davy Crockett had something to say about this.

And here is the video with Joe the Plumber.



And just for the heck of it, here are the top 10 true facts about Davy Crockett. He makes Chuck Norris look like a pansy.

"Email: Job Hunting"

The young lady who posted her counter-OWS-protest photo has basically filled her blog with emails she has gotten in response. Some take her position, many don't. Of those who support her, the emails generally can be summarized, "ditto." Of those who don't support, few are as thoughtful or compelling as the one below.

For every apparent indolent layabout hefting signs on Wall Street or as clueless and as frankly stupid as this guy, there are hundreds of Americans who are this lady's situation. And the scorn being heaped upon Women's Studies majors who wonder why they are both unemployed and unemployable should not be transferred to the countless people like this woman. They get no news coverage. So I will help give them voice.

I think the only reason I haven't joined the protest . . is because I'm pretty sure that the only people who could actually do anything to help. . .feel the way you do about it. Which is unfortunate. I'm young. I have experience in retail, sales, cashiering, desk work, cleaning, and assembly line work. I'm friendly. I'm competent. I have good references.

I have turned in over 200 job applications in the past year. Everything from McDonalds to housekeeping to receptionist positions. I've applied to clean kennels at the animal shelter. I've applied to sell phones. Everything I can think of. I went to the mall Store Directory and applied to every. Store. They. Have.

I have called every single one of them. I have had one interview for a permanent position. I didn't get it.

The only jobs I've been able to get are temp jobs. Full time, minimum wage. Unreliable. It's not enough to pay the bills. I'm not in debt. I have a roommate. She works. We recycle, we don't waste anything. We reuse plastic dishes. We compost our fruits and vegetables to put in the soil, so we can grow food and vegetables at home. We do everything in our power to spend as little as possible.

My husband just returned from deployment. His military job filled his position while he was gone, and refused to hire him back. He's highly skilled - and can't find work.

Tomorrow I will be going to the local DHS office to beg for food stamps so I can feed my daughter. Because the other option is to buy groceries and lose . . .what? Electricity? Water? The place we're renting?

I know. "Internet". Because it's a luxury.

Except the bit where nearly every place of business requires . . what? Yeah, you have to go to their website and fill out an application. Online. They don't have paper applications any more. Most don't even have the computer you can sit down at in the store.

I have spent two hours, every day, at my computer. Filling out applications. Replying to CL job ads. Looking through CareerBuilder and Jobfinder and the state jobs listing.

I just . . I just hope you realize, in some deep part of your soul, that it really IS that bad. That people are trying. And losing hope. And giving up.

I'm not ready for that yet - if I weren't a mom, though, I probably would be. It's so hard to be rejected like that, over and over, when all you want to do is work. To earn enough to get by.

Your blog is your opinion. And it's your right. You don't have to care what I have to say here. I'm not asking you to completely rethink your position. I just needed to say, from one human being to another - they aren't all lazy hippies. Some just don't know what else to do at this point.

Jobs don't want them. Employees won't hire them. For one reason or another, their lives fell apart. And these protests, I believe, give them a sense of community, like. . .somehow, MAYBE, it might make a difference.

Buffett can just pony up

I posted earlier that it's "Time to audit Buffett's books," because if it's true that "Warren Buffett paid less tax than his secretary, either his secretary's salary is higher than Buffett's or he's cooked his reported income somehow."

In response, reader, Joel W. emailed:

I believe that Warren Buffet said that he paid a lower percentage of his total income than his secretary, rather than that he paid less. He mentioned somewhere that he paid $6,000,000 in taxes.

Of course, he probably was talking about his total income, before deductions.

He could certainly pay more in taxes if he wanted to by not taking any deductions and not putting his money into a tax-exempt trust.

Full disclosure: I work for GEICO Insurance, which is owned by Berkshire-Hathaway, Mr. Buffett's company. Other than that, I have no connection with him; all I know is what I read in the blogs.

Joel, if all you know is what you read in the blogs, and assuming that you read a fair number and cross section of blogs, then you are probably unusually well informed. And you are right that if Mr. Buffett did not claim some deductions, then he would pay more money in taxes.

But it's easier even than that for Warren Buffett - or anyone else who think s/he is paying too little in federal taxes. I am hardly the first to point out that the US Treasury will accept direct donations. For example, anyone can send money designated to pay down the federal debt:

How do you make a contribution to reduce the debt?

There are two ways for you to make a contribution to reduce the debt:

• You can make a contribution online either by credit card, checking or savings account at Pay.gov  

• You can write a check payable to the Bureau of the Public Debt, and in the memo section, notate that it's a Gift to reduce the Debt Held by the Public. Mail your check to:

Attn Dept G
Bureau of the Public Debt
P. O. Box 2188
Parkersburg, WV 26106-2188

So if Warren Buffett - or anyone else - thinks they pay too little to the federal government, all they have to do is pony up more.

Another crash coming?

John Mauldin says yes, and this time it will be initiated by Europe and will drag the United States down with it:



Update: "Capital Flight Proves Confidence in European Interbank System has Collapsed"

Capital flight from European banks has now reached such a state that for one undisclosed bank needed emergency funding last week for a mere $5 million. Previously, the ECB stepped in to provide $500 million in emergency liquidity measures to non-disclosed banks.

As money flees Europe, it lands in US banks that do not know what to do with it. Capital flight has led to negative interest rates in the US.

Wasting a mint at the US Mint

"The only thing more shocking than the waste in this video is the fact that the report came from the MSM" - American Glob blog.



Short course: The US Mint, in compliance with a 2005 statute, spends $600,000 per day to make presidential dollars that are immediately placed into storage, not circulation. The Mint spends millions of dollars just transporting the dollar coins to storage and is about to spend another potful of money to build another warehouse.

The coins, of course, are made of an alloy of base metals and are therefore worthless in themselves.

The solution, ISTM, is to get the Mint out of making coins in denominations higher than 25 cents unless they are made of silver or gold proportional to their face value.

Fine silver or gold US Mint coins sell out completely. Example: in 2008 the Mint was authorized to strike and sell 2009-dated Ultra-High Relief Gold Eagle coins of one ounce of .999 pure gold. But the authorization did not continue after a specified run to be completed in 2009 - there were no 2010 coins or later.

These were collector, bullion coins denominated at $50 and are legal tender. Needless to say, the Mint did not sell them for $50! Spot gold was just under $1,000 then, and the coins sold for a premium above that. (I bought one, the limit per household, for $1,280 in February 2009, and it still sits in my lockbox. You can buy one on eBay if you wish, but gold spots now at almost $1,800.)

If the government wants dollar coins to circulate, it needs to make them with a dollar's worth of silver. That means that the government would have to take steps to stabilize the price of silver (leaving high-profit sales of gold coins as collectibles). Should the Mint buy silver every month or so at the spot price? Of course not; that would not stabilize silver's price.

But say the Mint was to strike a billion silver-alloy dollars. The government could announce it would buy silver at $30 per ounce, which is about where silver's spot was earlier this month. That would be a purchase 33,333,333.3 ounces, so that each dollar contained 1/30th ounce of silver. (The days of the one-ounce silver dollar being worth a dollar are gone forever.) This would stabilize the value of the dollar immediately and people would take them off the Mint's hands - no warehousing required.

Of course, there are some issues:

1. If the Mint is to buy silver at $30/ounce, what will it use for payment? Can't use silver for obvious reasons. Paper dollars? Why would a silver refiner take paper dollars to hand over silver metal that will be converted to hard dollars? (It would make sense in this way: paper money can be electronically transferred so that actual printed dollars need not actually change hands, but hard money can't.)

2. Silver has production costs that are incurred regardless of the spot price or the government's prospective price. A fixed buying price may depress rather than increase raw production of silver ore.

This highlights the difficulty of moving to gold- or silver-backed dollars that most hard-money advocates overlook.

Is gold a bubble or a new normal?

Harry S Truman said that he wanted a one-armed economic adviser because then he never have to listen to the adviser say, "But on the other hand..."

And so it seems to be with gold. On the bubble side, Dennis Gartman:

Dennis personally sold a lot of his gold in the course of the last 54 hours, and actually states that he wishes he sold everything. Dennis says that the way this market has traded, the manner in which the public got aligned with it and came into the gold market, the manner in which you had all signs replicating periods in the past when other markets made their tops, the fact that the SPDR Gold ETF (NYSE:GLD), became a more greater capitalized event than was the SPDR S&P 500 ETF (NYSE:SPY) — more value — you get at market tops.

Gartman feels we’re in a period of low growth and low inflation. that is not the right recipe for gold. He thinks the public was sold a very false supposed safe harbor in gold, and this is going to be a painful down move. Quote, “we have a lot further to go.”

On the "new normal" side, Tim Seymour:

Even counting the 2008-9 recession and the more recent downturn, emerging markets (NYSE:EEM) generated annualized performance of 18% a year since 2003.

Compare that to the S&P 500 (NYSE:SPY), which has delivered 5% a year over the same period: not terrible, but not great.

Meanwhile, it turns out that gold (NYSE:GLD) has surged an annualized 23% since 2003, with less volatility.

This is not just a bubble run for gold. It has been a structural shift in the way the world’s markets work and the way global risk is managed.

Yer pays yer nickel and ya takes yer chances. For the record, I am not invested in gold in any way.

Update: Another perspective:

Of particular concern is that the general public probably got into the gold trade during the later innings. “The public owns gold at high prices – and now any rally will be met with sellers,” Gartman says. He also thinks big hedge funds will be damaged by the sharp decline. Hedge funds who say they are long in a position if they hold it longer that 15 minutes stand to lose huge amounts of money in gold and that too could generate liquidation pressure.

I suspect this is true - members of the general public who heeded the incessant advertiements to buy gold now probably have, as a class, gotten into that market too late to avoid taking either small or negative gains when the selloff begins (if indeed a selloff does begin, of course).

People who invested in physical gold rather than gold funds or trusts will be cut up particularly rough because it will be very difficult for them to liquidate quickly. It will be a buyers market and you should expect to be offered no more than two-thirds of the spot price at the time you sell, maybe less.

End this welfare for the rich!

Glenn Reynolds links to NYU finance professor Viral Acharya's call to fix the housing market by ending income-tax deductions for interest charges on home mortgages.

The less told story on such subsidies is what they have done to generate more demand and push up prices, he says. “One the one hand you are actually getting all your subsidies, but you are actually paying more for the property you would have liked to consume,” says Acharya. “Therefore the real subsidy goes only [to those] at the very top. It is for people who are buying a second house. It is for people who are buying more land than they would otherwise.”

Not only have government subsidies failed to really help everyday people, except to “prop up the housing market artificially,” says Acharya, but the big question also remains: Who’s paying for all these subsidies? “It’s sort of a Ponzi scheme, because the current generation is reaping all its benefits, but we’re basically scaling up our government debt in response, and someone else is going to pay for it down the road.”

I called for ending the mortgage-interest deduction in January 2003, but went into detail in November of that year.

As for the mortgage-interest deduction, that needs to go too, and I own my home and benefit from it. The main objection to its elimination is that home values would plummet if the deduction is removed.

But what that really says is that the presumed tax savings are really ephemeral because the deduction is inflating home prices. So you have to pay more than the home is worth because of the deduction. That means that the deduction is skewing prices and hiding the true value of homes, and that alone is sufficient reason to eliminate it, IMO.

However, various studies (link, link, link, for example) show that eliminating the interest deduction would have very little effect on home values, and the effect would be temporary. Most taxpayers are not in the highest tax brackets, so their deductions are relatively modest.

Moreover, normal swings in the housing market are likely to swamp the effects of tax code changes. ... when marginal tax rates were decreased in the early and mid-1980s, reducing the benefit of the mortgage interest deduction, housing prices actually rose.

Glenn concludes, "[I[f the GOP wants to let the blue-state crowd experience the joy of tax increases, they should get behind plans to eliminate or cap the mortgage interest deduction, which will hit residents of higher-priced blue-state houses harder."

The question always comes down to, Whose ox is being gored?

No, we don't hate economics . . .

... we hate economists!

How did modern economics fly off the rails? The answer is that the "invisible hand" of the free enterprise system, first explained in 1776 by Adam Smith, got tossed aside for the new "macroeconomics," a witchcraft that began to flourish in the 1930s during the rise of Keynes. Macroeconomics simply took basic laws of economics we know to be true for the firm or family—i.e., that demand curves are downward sloping; that when you tax something, you get less of it; that debts have to be repaid—and turned them on their head as national policy.

As Donald Boudreaux, professor of economics at George Mason University and author of the invaluable blog Cafe Hayek, puts it: "Macroeconomics was nothing more than a dismissal of the rules of economics." Over the years, this has led to some horrific blunders, such as the New Deal decision to pay farmers to burn crops and slaughter livestock to keep food prices high: To encourage food production, destroy it.

Read the whole thing.

Dow plunges while Prez peddles

This morning's market:

Closeup:

But don't worry! Be happy!