Free Markets, Free People

Dale Franks

Dale Franks’ QandO posts

The most important issue in the country today (Updated)

Monty Pelerin, writing in The American Thinker, is thinking about the unthinkable. What would happen if the US held a bond auction..and no one bought any bonds? Even worse, what would happen if we were to default on the $16 trillion in bonds already outstanding?

What occasions this thinking is something he read in Bob Woodward’s new book on the Obama administration, a portion of which is excerpted in the Washington Post. This excerpt discusses last year’s debt ceiling crisis. In it Treasury Secretary Timothy Geithner tries to explain how bad it would be if credit markets stopped buying Treasuries.

But, here’s the thing:

Credit markets have (or nearly have) stopped US government debt financing. That’s why we have the Federal Reserve, the counterfeiter of last resort. If government can raise the debt limit, then it would be legal for the Treasury to issue new debt. The Treasury’s sibling, the Fed, would buy it by printing new money. That would allow the government to pay its bills for a while longer…

No one will buy US Treasuries other than the Federal Reserve. Raising the debt limit only puts the government more hopelessly in debt, ensuring that Treasuries will be even more difficult to sell. Without intending it, Geithner admits that Bernanke will be printing money until the electricity is shut off or until hyperinflation shuts everything economic down. In either case, we reach his "indelible, incurable" situation which will "last for generations."

BASE_Max_630_378Take a look at the monetary base of the United States, which I would describe simply as all the money of all types floating around in the economy. You know why that number has jumped massively since 2009? Because the Fed has been the major buyer of US treasuries, and it buys them by simply printing new money.

Now, the US Dollar is the world’s reserve currency. What that means is that it is expected to be strong, stable, and plentiful enough—though not too plentiful—to be used as the primary backup currency for the entire world’s global trade.

But, since 2009, we have essentially financed our massive debt, which is now at 104% of GDP by having the Fed print the money to buy the Treasury’s bonds. The chart you see here is the result of two separate rounds of Quantitative Easing of that sort, and the Fed is now considering QEIII.

Now, Greece, the sick man of Europe’s financial system, has a debt to GDP ratio of 128%. At the current rate of spending, we could reach that within a decade. But we won’t, of course, because at some point between 104% and 128% of GDP, we will have so much debt that the US will be the world’s financial sick man. At some point credit markets will simply not bid on US Treasuries, because the specter of inflation or default will loom so large that only the Fed would be stupid enough to show up at a bond auction.

When that happens, current foreign holder of US treasuries will face intense pressure to divest themselves of them.  Prices will collapse, and interest rates will skyrocket.  If the Fed steps in to buy those treasuries to support the price—which they almost certainly will, because politicians will demand it—we will then be clearly seen as fully monetizing the debt.

At that point, foreign holders of US dollars will demand that some other currency or asset be used as a reserve, at which point foreign holders of dollars will scramble to repatriate those dollars as quickly as they can.

The dollar will then become worthless in foreign trade, and we will face massive hyperinflation in the US.

On our current spending path, with our current level of debt, this is inevitable, and we have no idea when it will happen. We are literally a single bond auction away from a complete and utter collapse of the US financial and monetary system. We just don’t know when, exactly, that bond auction will be. It might be this week. It might be five years from now.

But, I repeat, at this point, barring a massive change to our fiscal and monetary policy, it is inevitable. There is no way credit markets will continue to buy US Bonds as our debt to GDP ratio climbs towards that of Greece. When that happens, we will either monetize that debt or default on it. Either way, the result will be years, if not decades, of American poverty.

And once that process starts, there will be no way to stop it.  We can’t come back a week later and say, "hey, we fixed it!" Once it starts…we’re done.

After WWII, the US debt to GDP ratio was 124%. At the end of WWII, we slashed government spending by 50%, and eliminated the most onerous and confiscatory wartime taxes, and, though marginal rates were still high, offered a myriad of exemptions that essentially ensured that no one paid the marginal rates. We also scrapped the entire wartime system of industrial production regulation and eliminated rationing. And, of course, we had the only fully industrialized economy left in the world, as everyone else’s had been bombed, if not back into the Stone Age, at least into the Age of Reason, and we became the world’s chief industrial power, exporter, and global business leader.

To do something similar today, we’d have to completely eliminate the entirety of the Federal government, with the exception of the Departments of State, Defense, Justice, Interior, and Treasury, and cut Social Security, Medicaid and Medicare spending by at least 50%.

That’s not going to happen. I believe the current Republican plan to attack the debt and balance the budget won’t even eliminate the budget deficit until sometime around 2040.

Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha!b That’s rich. Like we have 30 years available to fix this. It is to laugh.

Update: And, this morning, right on time, I see that House Speaker John Boehner says he’s "not confident" that Congress and the administration can reach a debt deal. In which case, Moody’s has already warned that they will downgrade the US credit rating by another step. Meanwhile, the rumor is that the Fed is now preparing for another $840 billion in quantitative easing.

That bond auction just keeps getting closer.

Dale Franks
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Dear Looker, photography is dishonest

In the comments of yesterday’s photoblogging thread, Looker asked why, when he takes photos of plain old stuff, it looks like plain old stuff. My answer is that he’s probably looking at the actual photograph he took, not the photo it could be.

For instance this is a crappy photograph:


This is better:


Unlike the photo on top which is a an uncorrected RAW export of the full original image to JPG format, the photo on the bottom crops out all the extraneous stuff possible, uses the rule of thirds to put the barred window on the bottom right, steps the exposure down about half a stop, warms the color temperature about 500°, and alters the color balance.

If I really wanted to spend the extra time to make it dramatic—and, now that I’ve done it, I wish I would have—I could’ve done this:


Or this:


This, by the way, is why you shoot in RAW format. You can fiddle with stuff as much as you want, and fiddling around in RAW is non-destructive. You can always recover the image as it was when it came out of the camera, no matter what you do to it. The only drawback is that the RAW image is about 6 times larger than a JPG, which, at 12.1 megapixel, translates to about 20MB per image.

So, I carry 4 32GB SD cards, and shoot as much as I want. Disk space is cheap.

Here are some more examples of dishonesty, when compared to the photos in the previous post. Here are the originals of two more images from the previous photoblogging post:



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Observations: The QandO Podcast for 09 Sep 12

This week, Bruce, Michael, and Dale talk about the Democratic Convention and the economy.

The direct link to the podcast can be found here.


As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.

A little Photoblogging

Chris and I went downtown to take some pictures. This time, instead of lugging around an SLR, I took my new Panasonic Lumix FZ200. It’s a 12.1 megapixel bridge camera, with a 28mm-600mm superzoom lens. I wanted to see how it would do as a walking-around camera. I think the answer is, "very well."


The Star Of India, docked in downtown San Diego.


Old advertisements


Downtown mall corridor


San Diego County Jail


A little bird


This odd building looks like an optical illusion


Chairs in a residential courtyard


A homeless man’s dog, downtown San Diego


LED marquee at the Balboa Theater


Trains at Union Station


Architectural detail of Union Station


Window reflections


Skyscraper courtyard


Architectural detail of a restored Victorian-era building


The Gaslamp District

Architectural detail, Ulysses S. Grant Hotel


Lobby, Sempra Energy building


Mosaic Wall, Horton Plaza


Park and skyline


Each window of this building has a screen that can be lowered to cover the glass


Architectural detail, Sempra Energy building


Restored Victorian-era building in the Gaslamp District


The Moon and Venus

And finally, to show you how powerful the zoom and video capabilities of this little camera are, I give you The Dog Walker.

Economic Statistics for 7 Sep 12

The only economic release today is the monthly Employment Situation. In August, 96,000 net new jobs were created, with the unemployment rate falling to 8.1%. Analysts had predicted a steady 8.3% unemployment rate with 125,000 new jobs created. Instead, job creation remains anemic, though the exit of 368,000 workers from the labor force lowered the unemployment rate, which makes the lower unemployment rate bad news. The labor force participation rate declined -0.2% to 63.5%, while the employment-population rate fell -0.1% to 58.3%, near the low since the recession, and, before that, 1983. 119,000 fewer workers identified themselves as employed last month, with the total falling to 142,101,000.

Average weekly hours were unchanged at 33.7. Average hourly earnings declined by one penny to $19.75. 

If the labor force participation rate were at the historical average of 66.2%, the real rate of unemployment would be 11.37%, up from 11.16% last month and 11.04% in June.

There’s just nothing positive in this report.

Dale Franks
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Economic Statistics for 6 Sep 12

The following US economic statistics were announced today:

Initial jobless claims fell sharply last week, down 12,000 to 365,000. The 4-week average rose to 371,250, however. Continuing claims fell 6000to 3.322 million.

ADP private payroll employment rose well above expectations to 201,000 in August, following a revised 173,000 total for July. This bodes well for tomorrow’s Employment Situation report.

The composite index from the ISM non-manufacturing survey for August rose 1.1 points to 53.7.

The Bloomberg Consumer Comfort Index fell rose slightly to -46.5.

The Challenger Job-Cut Report shows a total of 32,239 layoffs for August, the second lowest of the recovery.

Dale Franks
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Economic Statistics for 5 Sep 12

The following US economic statistics were announced today:

Nonfarm business productivity for the second quarter was revised upwards to 2.2%. Unit labor costs were revised downwards to a 1.5% increase. These revisions are in line with the earlier revisions to 2nd Quarter GDP.

The MBA reports mortgage applications fell by -2.5% last week, with purchases down -0.8%, and re-finance apps falling by -3.0%.

In weekly retail sales Redbook reports a strong 2.5% year-over-year sales increase, the strongest since June. ICSC-Goldman Store Sales fell -0.4% in the latest week, but is still up 3.7% year-on-year, the strongest increase of the summer.


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Economic Statistics for 4 Sep 12 (Updated)

The following US economic statistics were announced today:

The final manufacturing PMI from Markit Economics is 51.5, almost unchanged from July’s 51.4.

The ISM manufacturing index remains at contractionary levels, falling 0.2 points to 49.6. New orders are contracting for the third straight month, and are at the worst level since April, 2009, at 47.1. The lack of new orders means the production index fell a very steep 4.1 points 47.1, the first reading under 50 since May 2009. There’s really nothing positive in this report.

Construction spending fell unexpectedly in July, falling -0.9% from June. On a year-over-year basis, spending rose 9.3%.

Motor vehicles sales will be reported throughout the day today. The consensus estimate is for 11.1-11.4 million units sold domestically, with 14.0-14.7 units sold worldwide.

UPDATE: The auto industry posted the best August sales in 5 years, with domestic vehicle sales at an annual 11.6 million annual rate, and total vehicle sales at 14.5 million. Sales were up over 20% from a year ago.Toyota, the world’s largest automaker, showed a sales increase of 46%, and Honda’s sales rose 59.5% as the company’s recover from the earthquake and tsunami last year. All three domestic auto makers posted greater sales gains than analysts had expected.

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Observations: The QandO Podcast for 02 Sep 12

This week, Bruce, Michael, and Dale talk about the Conventions and whether any of it will matter in the end.

The direct link to the podcast can be found here.


As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.

Economic Statistics for 31 Aug 12

Here are today’s statistics on the state of the economy:

The Chicago PMI fell slightly to 53, but this is eclipsed by the new orders index jumping 2 points to 54.8.

The consumer sentiment index rose 0.7 to end at 74.3 this month, but the future expectations index is declining as gas prices rise.

Factory orders snapped back from June’s decline with a 2.8% increase for July. The big jump is led mainly by a 4.8% increase in durable goods from transportation orders for airplanes and autos. Ex-transportation, durables orders were up 0.7%. Capital goods orders show a big dip when aircraft orders are excluded. Despite the aircraft orders skewing the numbers, however, the overall report points to modest economic growth.

Dale Franks
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