Free Markets, Free People

Monthly Archives: July 2012


Worst-Case Scenario

Ever since the Fed began the first round of what is now called Quantitative easing, massively expanding the money supply, I’ve been worried about what would happen when demand began rising, and the Fed had to somehow try and draw all that extra cash out of the economy before it became inflationary—or even worse—hyperinflationary.

That’s still a worry for me, because I have, let us say, less than absolute confidence that Chairman Bernanke and his colleagues can pull that monetary sterilization off without a misstep.

Happily, that is becoming a secondary worry for me. Unhappily, that’s because it’s been replaced by a new worry, articulated by Paul Brodsky, bond market expert and co-founder of QB Asset Management. Mr. Brodsky maintains that the real inflationary danger lies elsewhere. I mean, it still lies at at the Fed and other Central Banks, but for a different reason.

The world has simply gotten itself into too much debt. There are creditors that expect to be paid, and debtors that are having an increasingly difficult time making their coupon payments. No amount of political or policy intervention is going to change that reality. (Unless a global "debt jubilee" transpires, which Paul thinks is unlikely).

Looking at the global monetary base, Paul sees it dwarfed by the staggering amount of debts that need to be repaid or serviced. The reckless use of leverage has resulted in a chasm between total credit and the money that can service it.

So how will this debt overhang be resolved?

Central bank money printing — and lots of it — thinks Paul.

The problem has been exacerbated by the fact that, when faced with an economic depression brought on by the collapse of a debt bubble—mainly in mortgages—the preferred policy solution pushed by governments all over the world, has been to try and re-inflate the debt bubble via stimulus spending. That is to say, overcoming the collapse of the mortgage debt bubble by creating a new, even bigger, sovereign debt bubble.

We have a pretty good idea of how much money there is in the world. We also have an idea of how much debt there is, from the sovereign debt of the united states, to credit cardholders in Finland. And it appears that there is not enough of the former, to pay off all the debts contained in the latter. If so, then that means a lot of banks—perhaps most of them—are in trouble. And we can’t have that.

What policy makers do not want to see is bank asset deterioration. That would lead to all sorts of bad things. You would see banks fail. You would see bank systems fail. You would see debtors fail and it would just feed on itself in an accelerating fashion. And so monetary policy makers have no choice but to deleverage in the other way, which is to colloquially print money; to manufacture electronic credits and call them bank reserves.

And to the degree that that extends into the private sector where debtors begin to fail en masse, that would increase failures of the bank assets in turn. And it would end the mortgage bond securities market, for example, and the leveraged loan markets, and end the private sector shadow banking system. So it does not work for anybody to have credit deteriorate. The only way to deleverage an economy is as we are saying: to create new base money with which to do it.

In other words, if central banks want to prevent entire banking systems from failing due to the collapse of the debts they hold as assets, they have no choice but to ensure that there is enough money available for everyone to meet their debt payments. To do that, they have to start printing out long sheets of beautifully engraved C-Notes. This will, of course, lead to massive inflation that will allow everyone to pay off their mortgages for the cost of a nice hat, while, at the same time, destroying the value of the world’s life savings.

This will clean up everyone’s balance sheets, and allow the world to create a brand new monetary base—let’s call it New Dollars—which, central banks having learned their lessons, will be impossible to over-borrow or inflate.

Hahahahahahahahahahahahaha! Woohoohoohoohoo! Hehehehehehehehehe. Heh heh. Ahhh. Sometimes I kill myself.

I’m just kidding with you. Seriously, they’ll try to start a new fiat currency that they’ll borrow on and debase until it collapses on our grandchildren, and screws them, too.

~
Dale Franks
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Media Appearance Today (Updated)

If you live on Florida’s Space Coast, I’ll be on AM 1300 WMEL around 3PM Eastern, to talk about the economy and stuff. If you’re not on the Space Coast, you can listen live, worldwide, here.

UPDATE: If you’d like to listen, here is the whole interview I did on WMEL today. I cut out all the commercial breaks and whatnot, but even so, it’s still 36:20 long, so consider it an extra podcast for the week.

I don’t consider myself a "renowned economist", however. Or even an economist at all. I mean, I got me the book learnin’ in it, and I know my ciphers and my figurin’ and whatnot, but my work in the field has been in economic journalism, rather than formal work as an economist.

But the WMEL guys were very nice to me, and I appreciate it.

~
Dale Franks
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Economic Statistics for 6 Jul 12

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

The Monster Employment Index rose 6 points to 153, as online recruiting picked up in June.

The Employment Situation for June is dismal for the 3rd month in a row. Total non-farm payrolls increased by 80,000. The unemployment rate is unchanged at 8.2%. Hourly earnings increased by 0.3%, while Weekly hours increased by 0.1 hours to 34.5 hours. Private payrolls increased by 84,000. The U-6 unemployment rate, the broadest measure of unemployment/underemployment, rose 0.1% to 14.9%.  The labor force participation rate and the employment/population ratio are both unchanged at 63.8% and 58.6%, respectively. Both are the lowest since 1983.

~
Dale Franks
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Jobs for June? Not many

But the “official” unemployment rate stayed at 8.2%.  The broader measure of unemployment – includes job seekers as well as those in part-time jobs – inched up from 14.8% to 14.9%.

GDP?  Predictions have been revised down:

Federal Reserve officials last month lowered their economic-growth projections to between 1.9% and 2.4% this year, and forecast the jobless rate would hold between 8.0% and 8.2%.

That’s not a recovery rate by any means (and given how accurate former predictions have been, I wouldn’t count on the unemployment rate staying as low as 8.2%).  But it is the reality of the situation and one that will definitely have an effect on the election.  That is if people are reminded of some promises made by the administration.  You remember these:

 

juneunemployment

 

Can you say “utter failure”?  Of course you can.  As with ObamaCare, the people were sold a bill of goods about the recovery plan.  In fact it ended up being a huge political payoff plan while our leaders told us they were focused like lasers on recovery.  4 years later, here we are.

We were supposed to be at 5.6% now, with the stimulus plan enacted. 

That was the promise.

Of course, this administration has promised all sorts of things it hasn’t delivered, so I’m sure that their failure here doesn’t necessarily come as a surprise to anyone but the media.

Forward.

~McQ

Twitter: @McQandO


Pan-Islamist Muslim Brotherhood takes over in Libya

Yes sir, that Arab Spring is really what we all wanted, isn’t it?  So much so that the US and NATO helped this particular one along.  In Libya:

While the elections for a 200-member National Congress is unlikely to grant a majority to any one faction, the Muslim Brotherhood and its Islamist allies are confident they can join their counterparts in Tunisia and Egypt at the helm of leadership.

Negotiations between the Muslim Brotherhood and a secular-based political movement led by former interim prime minister Mahmoud Jibril have focused on forming a post-election government as soon as the result is known.

An adviser to Mr Jibril said the former prime minister was likely to take the post of figurehead president with Mustafa Abu Shagour, currently interim deputy prime minister of the Muslim Brotherhood, taking the prime minister’s slot as head of government.

The Muslim Brotherhood would dominate the ministries.

And what pan-Islamist faction is positioned in Syria along with its militant al Qaeda brothers to take the reigns there when the current government eventually falls?

Why the same Muslim Brotherhood now ascendant in Egypt, Tunisia and Libya.

All good, right?

Exactly what we expected and wanted, right?

Foreign policy success, right?

Caliphate?  What Caliphate?

Forward.

~McQ

Twitter: @McQandO


Woohoo, Marx is cool again

Marx is making a comeback?  Yes friends please read this bit of propaganda  (beside the nonsense put forward by the “Marxist thinkers” – wait, isn’t that an oxymoron?):

…The Communist Manifesto: "What the bourgeoisie therefore produces, above all, are its own grave-diggers. Its fall and the victory of the proletariat are equally inevitable."

[…]

Today, 164 years after Marx and Engels wrote about grave-diggers, the truth is almost the exact opposite. The proletariat, far from burying capitalism, are keeping it on life support. Overworked, underpaid workers ostensibly liberated by the largest socialist revolution in history (China’s) are driven to the brink of suicide to keep those in the west playing with their iPads. Chinese money bankrolls an otherwise bankrupt America.

The irony is scarcely wasted on leading Marxist thinkers. "The domination of capitalism globally depends today on the existence of a Chinese Communist party that gives de-localised capitalist enterprises cheap labour to lower prices and deprive workers of the rights of self-organisation," says Jacques Rancière, the French marxist thinker and Professor of Philosophy at the University of Paris VIII. "Happily, it is possible to hope for a world less absurd and more just than today’s."

Can anyone spot the elephant NOT in the room?  No? 

What is missing in this supposed formula of disaster in the West?  Why Western government profligacy usually driven by what?  Social welfare programs.   And they’ve produced what?.  Unsustainable debt.  Unsustainable spending.  Crony capitalism.  Etc.

What happened in the West wasn’t, as the left keeps trying so hard to claim, a matter of capitalism or free markets going bad (or unchecked, or unregulated, or, well you name it).

What happened was mostly a product of crony capitalism, much of the problem driven by government policy.  Because of that collusion all the warning signs a market would have sent were paved over or ignored.  It was as much a problem of government policy driving perverse incentives as “greed”.   Greece did not happen because of capitalism.  And, frankly, neither was what happened here a result of capitalism.  Not, at least, as anyone who knows what the word means would define it.

So the real irony is that where a country begins to let markets work as they should – note the word “begins” – it sees rapid and incredible growth as well as spreading prosperity.  That would be China.  And the fact that China is still a Communist country doesn’t at all mean their “socialism with Chinese characteristics” is the reason they’re doing well economically (as they’ll find out soon enough when their bubble bursts).

Mostly, in China’s case, it was a matter of timing, which, by the way, is beginning to turn on them.  Some of the industries that settled in China are looking or locating in India (which, for lack of a better term, is about to become the “new China”).

Why?  Because the prosperity that China has enjoyed because it was well positioned to take advantage of the global markets at the time has driven expectations in China up exponentially.  That means demands for higher wages and better benefits.  That means a higher cost of doing business which will eventually see China priced out of certain markets and industries it now enjoys some exclusivity in.

That’s capitalism and my guess is the Chinese will do everything in their totalitarian power to fight it and thereby hold back the progress of their people.  That’s  how socialism/communism works.

So let Marx make a comeback.  As with most of these periodic absurd paeans to socialism that usually begin in academia, what is always, always, always swept under the rug is that Marxism in its various forms last century was the cause of the following deaths:

Given those numbers (by the way I think the Latin American numbers are low, especially if they include Cuba), it still boggles the mind that somehow there exist out there people who claim to be “Marxist thinkers” and that anyone takes them seriously or, in fact, gives them the time of the day.

It reminds me of the Che chic.  The elevation of a sociopathic mass murderer to cult revolutionary status.  The Horst Wessel of Communism. 

A man who spent much of his time executing helpless prisoners (to include kids) has been scrubbed by people much like the “Marxist thinkers” above to be reborn as some ideal revolutionary.  But under that veneer, he still remains a sociopathic mass murderer  that was bent on achieving the totalitarian subjugation of the people of Cuba and anywhere else he could spread his “Marxist revolution”.

That’s precisely what you’re seeing with the nonsense about Marx being reborn.  A new paint job on the same old totalitarian killing machine.  It makes you wonder about the intellectual heft of those who would, once again, fall for the false promises of an ideology which has proven its bankruptcy with the lives of over 90+ million people.

But they’re out there.


Economic Statistics for 5 Jul 12

The following statistics were released today on the state of the US economy:

Initial claims for unemployment fell 14,000 in the June 30 week to 374,000, much better than expected. The 4-week moving average fell slightly to 385,750. Continuing claims in rose 4,000 to 3.306 million with the 4-week average falling 3,000 to 3.304 million. The unemployment rate for insured workers is 2.6%, which is unchanged since March.

ADP’s private payroll count shows a better-than-expected rise of 176,000, hopefully pointing to strength for tomorrow’s employment situation.

Unlike the ISM manufacturing index, the ISM Non-Manufacturing Index stayed positive at 52.1, though that’s still slower than last month.

Chain Store Sales had a disappointing June, with many retailers lowering guidance, reporting lower rates of year-on-year growth than in May.

MBA Purchase Applications fell -6.7% last week, with purchases up 1.0%, but refinance applications down -8.0%.

The Challenger Job-Cut Report’s layoff count for June is 37,511, down from 61,887 in May and down from 41,432 in June last year.

The Bloomberg Consumer Comfort Index dropped from last week’s 2-month high to -37.5.

~
Dale Franks
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ObamaCare: It just gets better and better

And, of course, I say that facetiously.   As it stands now, it has fostered more government regulation, more bureaucrats and more intrusion in epic proportion:

"There’s already 13,000 pages of regulations, and they’re not even done yet," Rehberg said.

"It’s a delegation of extensive authority from Congress to the Department of Health and Human Services and a lot of boards and commissions and bureaus throughout the bureaucracy," Matt Spalding of the Heritage Foundation said. "We counted about 180 or so."

So, minimally (we all know they’re not nearly done) 13,000 new pages of regulation, 180+ boards, commissions and bureaus and, of course, scads of bureaucrats to fill them.

Then there are the new broad powers granted HHS and the IRS.

Yes, friends, that’s right, this is how you make health care less expensive and better, not to mention making government less intrusive.

Probably the funniest thing, in a sad and ironic way, is the fact that there are still millions of people out there who believe the propaganda that sold this crap sandwich to the public.    Someone among them I’m sure will someday be able to explain how adding costly regulations and layers upon layers of bureaucracy somehow helps reduce the cost of health care delivery.  

According to James Capretta of the Ethics and Public Policy Center, federal powers will include designing insurance plans, telling people where they can go for coverage and how much insurers are allowed to charge.

"Really, how doctors and hospitals are supposed to practice medicine," he said.

Wait, wasn’t one of the primary problems with the old system, per the Democrats, a problem of insurance companies telling doctors how to practice medicine?

See, solved by government, right?

In fact, one master has been replaced by another one, the newest master being the most inept, inefficient and corrupt of the two.  And, of course, no one has yet explained how all of this is going to ensure people have better access to a doctor.  Why?  Because, quite simply, having insurance doesn’t guarantee care.  And with the disincentives provided by massive increases in regulation (and the increase that will cost for compliance) and oversight via these board, commissions and bureaus, my guess is there will be fewer doctors in the future.

So prepare to enjoy the dawning of the age of ObamaCare and the attendant disappointment, shock and anger it will eventually engender among the public.  There are some things that one shouldn’t mess with, and people’s health care is one of them.

Forward.

~McQ

Twitter: @McQandO