Bruce mentioned yesterday that the 5-year note auction drew thin demand, with a low bid-to-cover ratio, and a steep drop in indirect buyers. This led to a jump in interest rates for both the Fives and the Tens also went up by 13 basis points. meanwhile, investors began moving into corporate paper, instead of treasuries.
I also note that this week saw weaker than expected durable goods orders, atrocious new home sales, and initial unemployment claims still at 442k–which is better than it was last week, but not great.
The “recovery”, apparently is still on pretty shaky ground.
Meanwhile, the new health care reform law attempts to shift a bunch of spending via Medicaid to the states, who are not really in a position to cover those costs, as state tax revenues have sharply declined from 2007.
In short, with a weak economy, we are planning on adding what may be as much as $2 trillion to the deficit over the next 10 years–deficits that are already at $1 trillion per year as far as the eye can see. How neatly that coincides with the announcement that Social Security will run into the red this fiscal year, paying more in benefits than it receives in payroll taxes, six years earlier than previously expected.
So, we got that going for us.
The United States is supposed to be the richest country in the world. But, on our present fiscal course, that cognomen will not attain in a very few years. We simply will not have enough money to service the debt load we will be carrying. In a very real sense, it doesn’t matter whether the Republicans can win in November and repeal the HCR law just passed. Or Cap & Trade. Or Medicare Part D. Or whatever.
We are directly on course to having to run massive inflation by monetizing the debt, or to simply defaulting on it, both of which will result in massively high interest rates, and economic stagnation. With the added bonus of runaway inflation, for good measure.
That this will happen cannot be in serious doubt if we continue our present course. Our fiscal and monetary policies are self-evidently unsustainable.
I can only presume that the Democrats believe that, at the appropriate time, fairies will appear out of thin air to sprinkle magical pixie dust on the economy, and all will be well. The current raft of policies they are proposing to enact will crush the economy. We’ve seen it happen time and again in South America, and now even in the EU, in which the Greeks are headed for a default in the very near future.
What is coming out of Washington is not policy. it is full-scale flight from reality.
Just as the Democrats add another massive new entitlement to the laws of the land, one of the oldest entitlements “officially” goes into the red:
This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.
Stephen C. Goss, chief actuary of the Social Security Administration, said that while the Congressional projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual.
The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.
Three things to be gleaned from this excerpt. 1) CBO numbers are static numbers based on nothing changing over the years in which their “scoring” takes place. Obviously that’s not reality and the CBO numbers for health care reform will prove that again soon. 2) Democrats will have to eat their words about Social Security being solvent and not in trouble. Many of the same one’s who made that claim recently also gave you the “numbers” in the health care bill scored by the CBO. And finally, 3) this isn’t a can Obama can kick down the road is it?
Not that he won’t try.
Because according to the NY Times, Cap-and-trade is the next legislative item the administration wants Congress to act upon.
Jobs? The economy?
What in the world are you smoking – they don’t give a rip about jobs, the economy or you. There’s an agenda at stake here. The window’s closing fast. And what the citizens of America need or want aren’t important right now. Don’t believe me? Read the article cited above – it’s another economy killing tax slated for an April introduction into the legislative process.
Are the scales perhaps beginning to fall from a few eyes yet?
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The French Finance Minister has noticed that the disparities within the European economy are causing a number of issues, and fingers the….Germans!
“Clearly Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labour costs. When you look at unit labour costs to Germany, they have done a tremendous job in that respect. I’m not sure it is a sustainable model for the long term and for the whole of the group. Clearly we need better convergence.”
You see, having an economy so efficient that you can be more competitive than your neighbors with high wages and a high standard of living means you need to change so that the French, Greeks and other assorted PIIGS can continue down the path they have chosen. The Germans are just too darned efficient for the greater good.
In the interest of being helpful I have identified several important initiative’s that the Germans should adopt to align themselves more fully with their neighbors.
- Do not keep your debt levels below 3% of GDP…ever.
- Encourage massive strikes at the drop of a hat.
- Make public services far more attractive than working in the private sector, with massive strikes and riots to keep it that way.
- Make it almost impossible to layoff anyone for any reason.
- Mandate at least six weeks paid vacation for every employee.
That should make sure your economy is not too efficient.
Is China’s economy about to rollover?
I won’t explain this, just let it sink in:
I don’t think it will be as bad as Japan, but the evidence isn’t giving me any great comfort either.
I love Apple, and I love my iPhone. Still, is Apple really worth more than Walmart? Or these various baskets:
- 4x the global smartphone market
- 5x the global music market
- 100x the global smartphone app market
- Enough to buy HP, Dell and Hitachi, with mad money left over for Xerox or Seagate
Yep, that whole efficient markets hypothesis may take a beating again.
Did any of you see Michael Lewis on 60 Minutes Sunday? If you didn’t, I highly recommend it.
Cross posted at The View From the Bluff
I’m not sure how much more of a blatant warning than this can be sounded over the financial path the Obama administration plans on taking us:
Moody’s Investor Service, the credit rating agency, will fire a warning shot at the US on Monday, saying that unless the country gets public finances into better shape than the Obama administration projects there would be “downward pressure” on its triple A credit rating.
Examining the administration’s outlook for the federal budget deficit, the agency said: “If such a trajectory were to materialise, there would at some point be downward pressure on the triple A rating of the federal government.”
That’s a very civilized way of saying “cut spending and cut borrowing or we’ll cut your credit rating so you can’t borrow and can’t spend”. The budget deficits projected by the Obama administration would eventually see 15% of the government’s future revenue committed to debt service – about the same as in 1983. However:
This time the servicing burden would be harder to reverse, however, because it would not be caused by high interest rates but by high debt levels.
Moody’s says it doubts the political will to raise taxes significantly from their present 14.8% of national income level or to cut spending from 25.4% of national income. That, of course, means an ever increasing gap between revenue and spending and jeopardizes the nation’s credit rating.
Moody’s isn’t the first rating firm to issue this type warning:
The report follows concerns recently expressed about the US public finances from the other large rating agencies. Standard & Poor’s warned last week the triple A status of the US was at risk unless the country adopted a credible medium-term plan to rein in fiscal spending. Fitch Ratings issued a critical report on the US in January.
Fitch said: “In the absence of measures to reduce the budget deficit over the next three to five years, government indebtedness will start to approach levels by the latter half of the decade that will bring pressure to bear on the triple A status.”
Or, we’re headed toward a financial cliff and right now our leadership is hitting the accelerator. If you think we have financial problems now, watch what happens of we suffer through the downgrading of our national credit rating.
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Just as we’ve seen “good news” about the economy claimed in quarters when government spending (“cash for clunkers”) and inventory restocking drove the positive numbers, now we’re being told that a raft of temporary jobs might be a positive sign for the unemployment numbers:
The U.S. Census Bureau expects to add up to 750,000 workers to its payroll by May, a hiring binge that could knock the unemployment rate down by as much as a half-point.
The once-a-decade census is coming at the best possible time for President Barack Obama and congressional Democrats, who have taken political lumps for more than a year over a jobless rate that stands at 9.7 percent.
Some think the administration will get good news as soon as the next monthly labor report, which will be released the first Friday in April.
Yeah – counting people for the government is not exactly that of which economic powerhouses are made. While it’s temporary good news for those with the short-term jobs, it is not a solution to the overall rate of unemployment, regardless of what it might do to the U-3 percentage of 9.7%.
“This is the best-timed census you could ever dream of,” said Heidi Shierholz, who tracks the labor market at the left-leaning Economic Policy Institute. She believes the March unemployment report will show the economy added jobs instead of subtracting them.
If it happens, it will be only the second positive-numbers jobs report in more than a year. But in this case, it could lead to further positive job numbers in the months ahead.
Really? How’s that? These are temporary jobs (6 weeks) and part-time to boot (19 hours a week). In other words, in about a month an a half, these jobs go away and the 750,000 that were added to the workforce and will take the unemployment numbers down, will have to be subtracted. But it is clear by Ms. Shierholz’s words that the spin about the dropping unemployment rate driven by these temporary jobs will be fierce and you can expect broad claims to be made concerning future employment that will most likely have no basis in fact.
Right now it is all about the numbers. But their substance will be masked as the “experts” laud these 6 week part-time government jobs which produce better unemployment numbers as indicators that the employment picture is “improving”. Don’t be fooled. Do a little subtraction in your head each time the claim is made and you’ll probably be much closer to the real percentage than will the delusional “experts” (they’ll begin terminating the jobs near the end of June). And remember – until the business climate improves, hiring is not likely to happen. 750,000 temporary government jobs does nothing to improve that climate.
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You know a problem is obvious when even Bob Herbert figures it out:
Instead of focusing with unwavering intensity on this increasingly tragic situation, making it their top domestic priority, President Obama and the Democrats on Capitol Hill have spent astonishing amounts of time and energy, and most of their political capital, on an obsessive quest to pass a health care bill.
Health care reform is important. But what the public has wanted and still badly needs above all else from Mr. Obama and the Democrats are bold efforts to put people back to work. A major employment rebound is the only real way to alleviate the deep economic anxiety that has gripped so many Americans. Unaddressed, that anxiety inevitably evolves into dread and then anger.
But while the nation is desperate for jobs, jobs, jobs, the Democrats have spent most of the Obama era chanting health care, health care, health care.
That obsessive quest, as Herbert calls it, to the detriment of what should be the real priority of this administration and Congress removes completely the label of “pragmatic politician” from behind Barack Obama’s name. He’s an ideologue, pure and simple, and is engaged in an purely ideological attempt to pass a far-left fantasy while he has the opportunity. Jobs and the economy be damned, his focus is on increasing the government’s role in health care by any means necessary.
Now of course, Herbert doesn’t go that far in his piece. However he does trash one of the favorite beliefs of the Democrats as we at QandO have done for quite some time:
The talk inside the Beltway, that super-incestuous, egomaniacal, reality-free zone, is that President Obama and the Democrats have a messaging or public relations problem. We’re being told — and even worse, Mr. Obama and the Democrats are being told — that their narrative is not getting through. In other words, the wonderfulness of all that they’ve done is somehow not being recognized by the slow-to-catch-on masses.
Herbert calls such belief “silly”. It is silly, although not for the same reasons Herbert chooses. In fact, the narrative has been both understood and rejected. It is through maintaining their unsubstantiated belief that it is the public that is the problem, and not their policies, that lawmakers continue the “obsessive quest”.
After the usual, expected and mostly unsubstantiated “Republicans have no solutions” jab (because anything else might lend aid and comfort to the enemy), Herbert concludes:
The many millions of new jobs needed to make a real dent in the employment crisis are not going to materialize by themselves. Mr. Obama and the Democrats don’t seem to understand that.
Actually they will materialize by themselves – unless government gets in the way, imposes new taxes (health care reform and cap-and-trade, etc.), more onerous regulation and otherwise keeps the business climate roiled and uncertain. Thus far, that’s precisely what the administration and Congress have managed to this point.
The quest for more government control of health care has exhausted the political capital of the Obama administration and the Democratic Congress. In the end, regardless of what happens with its passage, this ideological obsession is going to hurt those engaged in it pretty badly. The only question is the extent. But when even Bob Herbert is able to remove the blinders and for once see the real problem from which the Democrats and Obama suffer, you know it has to be just as obvious to the vast majority of the public. It’s not the “narrative” stupid, it’s the focus. And having the wrong focus is detrimental to your political health.
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When it comes to employment, we have dug ourselves a tremendous hole. I will be surprised if unemployment is back to where it was four years from now. This chart gives us all an idea why:
Of particular interest is the path of the last two recessions which had anemic job growth despite relatively shallow initial dips. The recovery period for each far exceeded previous recessions. If we see a repeat this time the V shaped recovery in employment we keep hearing about is not going to happen. So why the difference?
The earlier recessions exhibited a similar pattern of sharp drops in employment followed by sharp recoveries as the economy snapped back. The change that we began to see in the 1990 recession is partly structural. The layoffs associated with the much larger manufacturing sector in recessions of the past were associated with a rundown in inventories which then snapped back once the inventories were depleted.
Something else is going on here as well in my own opinion. As the eighties gave way to the nineties the US was in the early stages of an experiment in monetary and economic policy. Monetary policy was explicitly geared to reduce economic volatility. This led to attempts to reduce the severity of recessions, and also led to a reduction in upside volatility as well. This was (at least for a while) somewhat successful, resulting in what became known as “The Great Moderation.” The recession of 1990 was the first crack in that system. Attempts to limit volatility not only reduced the violence of the recession, but the explosive growth typical after recessions previously. It also was a recession which was a result of a financial crisis (the S&L’s) and the real estate boom of the late eighties. The deleveraging of the finance and debt recession (what we are going through now, only in miniature) was sluggish. It took a good while for the adjustment to occur.
We followed a familiar script of lowering interest rates and encouraging credit expansion. Constant expansions of credit whenever things slowed kept the engine running until a bigger crisis hit with the bursting of the tech and telecom bubble. Once again we applied even more credit easing to soften the blow, and the attempt to avoid wringing the excesses of credit from the system led to another sluggish recovery with anemic job growth. Profits however were large and the return for the steadily growing financial sector was immense. If the economy was going to be stabilized by constant applications of credit expansion, then the financial sector was the main beneficiary. Finally we have the latest crisis, one where the financial system itself was the most important bubble.
What we can now see is that the types of recessions we have been experiencing are successive deleveraging cycles, each “solved” by releveraging the economy and leading to a bigger crisis down the road. Sadly deleveraging processes, especially if drawn out by keeping them from running their course, result in tepid job growth. We are now in a massive deleveraging cycle which we are once again trying to solve by adding massive debt to the system. Once again job growth and recovery is slower. Unless we break this cycle (which would be very painful) we should expect nothing different in the outcome, except that the problem is bigger and will last longer.
Cross Posted at: The View from the Bluff
How can you tell when claims of budget hawkishness and fiscal responsibility are all talk and no walk? When you put deficit commissions together with no power and propose trillion dollar a year deficits for the next 10 years as the Obama administration has:
A new congressional report released Friday says the United States’ long-term fiscal woes are even worse than predicted by President Barack Obama’s grim budget submission last month.
The nonpartisan Congressional Budget Office predicts that Obama’s budget plans would generate deficits over the upcoming decade that would total $9.8 trillion. That’s $1.2 trillion more than predicted by the administration.
Any idea of where we’d get the money? We certainly don’t have it. And if you guessed China, et. al., yes, you’re right – for all intents and purposes we’d become a wholly owned subsidiary of the PRC.
The new report predicts that debt held by investors, including China, would spike from $7.5 trillion at the end of last year to $20.3 trillion in 2020. That means interest payments would more than quadruple — from $209 billion this year, to $916 billion by the end of the decade.
So, we’d be paying almost a trillion a year in interest (with even more money we don’t have). You can imagine what a debt like that would do to us, not only the economy but in terms of national security.
The deficit picture has turned alarmingly worse since the recession that started at the end of 2007, never dipping below 4 percent of the size of the economy over the next decade. Economists say that deficits of that size are unsustainable and could put upward pressure on interest rates, crowd out private investment in the economy and ultimately erode the nation’s standard of living.
And is the White House concerned? Well, other than lip service, it has moved decisively to address the problem /sarc.
“While the president is intent on ramming through Congress a new trillion-dollar health-care entitlement, he appears far less concerned with addressing the looming crisis of entitlement spending already on the books,” said Rep. Paul Ryan of Wisconsin, the top Republican on the Budget Committee. “Instead, he delegates this task to a ‘Fiscal Commission’ — which would not even report until after the next election.”
Other than make recommendations, the “Fiscal Commission” has absolutely no power. And the White House has shown no real interest, other than the usual lip service, in addressing the huge deficits projected for the next 10 years. I’ll be interested to see if the White House continues to treat the CBO’s reports as the gold standard after this one saying the administration has proposed an even higher debt than it claimed.
And, of course, one of the rather large points is the effect of having countries like China holding 20 trillion in US debt instruments and the amount of control that grants such countries over what we can or can’t really do – economically, in foreign policy, militarily, etc. That much debt becomes a weapon, whether the administration or others want to admit it or not. It’s an economic bomb and detonating it would have a profound negative effect on us and our economy and our enemies know it. It reminds me of the saying about how a capitalist will sell you the rope by which you hang him. That’s precisely what we’re doing with this debt problem and our desire to spend what we don’t have.
The time for a sane fiscal policy which cuts spending and the size and scope of government is long past due. And even if the politicians don’t recognize it yet, it is the public’s understanding that the time has come that is driving this discontent manifested in the Tea Parties and the overwhelming “wrong track” majorities to be found in polls which track whether or not people believe the country is on the right track or the wrong track. Democrats thought the public believed the country was on the wrong track during the last administration because of Bush. But after a year of Obama, those same numbers are even higher.
The people may not really like the fact that such measures must be taken, but they are prepared for them. They understand that this spending addiction, if continued, has no acceptable outcome and that the longer it continues the worse the outcome will be.
Step one is getting sanity back into the federal budget. And adding 9.8 trillion to an already huge debt while pretending to be concerned about deficit spending isn’t how that is done.
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Poor Harry Reid. You can understand why Rush Limbaugh calls him “Dingy Harry”. For a public servant of many decades who is supposedly practiced in the art of public speaking, he sure can mess it up. Today I assume he was trying to tell us that the 9.7% unemployment rate that the government claims and the number of unemployed reported this week didn’t go up as high as expected. This is how it came out:
“Today is a big day in America. Only 36,000 people lost their jobs today, which is really good,” Reid said Friday on the Senate floor.
I’m sure those 36,000 are just happy as can be about that, Mr. Reid.
But as most informed folks know, that 9.7% figure doesn’t really reflect the full extent of unemployment. The government’s “U-6″ number is much closer, but isn’t used because – well, take a look and you’ll figure it out for yourself:
The U.S. jobless rate was unchanged at 9.7% in February, following a decline the previous month, but the government’s broader measure of unemployment ticked up 0.3 percentage point to 16.8%.
Despite the Obama administration claim today that those measures they’ve put into place appear to be working, the U-6 says otherwise:
The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. Though the rate is still 0.6 percentage point below its high of 17.4% in October, its continuing divergence from the official number (the “U-3″ unemployment measure) indicates the job market has a long way to go before growth in the economy translates into relief for workers.
Here’s the key and a reason you should take all this happy talk with a grain of salt:
A U-6 figure that converges toward the official rate could indicate improving confidence in the labor market and the overall economy. This month pushes convergence even further away.
And it “pushes convergence … away” by a significant amount.
One of the things to be wary of is the administration will start believing its own press and at the first sign the U-3 begins to dip, figure it can begin to further its tax and spend agenda. Until you see the U-6 headed in the same direction as the U-3 and showing significant drops, nothing is getting better on the employment front. And until that happens, the recovery is not going to “take off”.
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The Employment Situation statistics are due out later this week. They will be bad. I know this, because Larry Summers is already spinning them.
White House economic adviser Larry Summers said on Monday winter blizzards were likely to distort U.S. February jobless figures, which are due to be released on Friday.
“The blizzards that affected much of the country during the last month are likely to distort the statistics. So it’s going to be very important … to look past whatever the next figures are to gauge the underlying trends,” Summers said in an interview with CNBC, according to a transcript.
So, please, when you see the numbers of Friday, be sure you don’t assume that they have any policy implications. It’s all about the weather, you see.
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