Thursday, December 16, 2010

The real Armageddon

New consumer price index numbers are out and core inflation continues to drop, now getting precariously close to zero. This is the most troubling of economic news in a world largely consumed with troubling news. The Fed is printing money like they got a 2 for 1 deal at the copy shop. However investors and corporations continue to behave like we are entering a deflationary slump with bond prices continuing to fall and the Fed’s QE2 having no apparent effect.

The average consumer isn’t concerned that prices are falling, he just likes the deal he got on the new flat screen for Christmas. Never mind that his wages are continuing to fall and that he may lose his job tomorrow. Once we tip over into a deflationary spiral it becomes nearly impossible to stop. Consider that two years ago when things were really falling apart we weren’t experiencing actual deflation but rather what economists call disinflation or a lessening of inflation. We are really in far worse condition now, in case you wondering why there are no new jobs.

Obama had the captains of industry over to the White House this week to find out how to get them to spend the 1.7 trillion in cash they are sitting on. Obama would like them to create a few million jobs but they are barely operating a 80% capacity and inventories are high. Contrary to Reagonomics, supply side simply doesn’t work.

We don’t know if they asked Obama for a tax holiday on repatriating foreign profits as Bush did for them but you can bet it’s on their Christmas wish list. You see over a trillion of this corporate cash is overseas and they don’t want to pay taxes on it to bring it back. On the other hand maybe they would rather keep there.

You see in reality American corporations are not in good shape at all. They have trillions in junk bonds on the books that they were able to sell at a fraction of percent interest thanks to the Federal Reserve lending money at nearly zero interest rates. So this cash is really just borrowed money, they haven’t paid their taxes on the profits they did make and instead they spent the money on executive compensation.

Really these companies, like the big banks are just zombies. GM wasn’t the only big company bailed out the last time because of all this Federal Reserve money. If deflation strangles demand and slashes corporate revenue then a lot of these companies will collapse in a matter of weeks once the panic starts.

This could be all unraveled by strong government intervention but you have a perfect storm brewing for inactivity. The Obama administration is still plagued with a lack of leadership by having hundreds of his appointments being held up by the Republicans in the Senate. Congress is now going to be hamstrung by tea baggers who believe there should be no government. If things start to unravel then the collapse of the USD as an international currency is a very real possibility and we are completely dependent on imports that we will have no way to pay for.

No wonder they are talking about “duck and cover”, they don’t want to talk about the real Armageddon that’s coming.

Tuesday, December 14, 2010

Get accustomed to the new normal

The Federal Reserve has again confirmed its intention buy nearly a trillion dollars in privately held US Treasury bonds. The stated intent is to drive down interest rates but exactly the opposite has happened with bond rates hitting a seven month high. This includes 10 year notes and it’s this interest rate that is used as the basis for home mortgage rates so they are shooting up again.

There is a huge budget problem if bond rates were to continue to rise as a large portion of the 14 trillion the government owes is in short term bonds that need to be constantly recycled. The Treasury must also sell more trillions to finance the Republican plan of spend and not tax fiscal policy. If bond rates were to spike to the high teens as they did in the 1980s, the amount paid in interest alone would break the Federal budget.

Even with much of the debt sold in the last couple of years paying very little interest and at times bonds sold at a negative rate (the Treasury actually made money),  the annual outlay for interest has still has been over 200 billion. At the historical normal interest of 5% interest rate for bonds the outlay should be running close to 700 billion right now. Triple or quadruple that and you can see where we would be.

The question is what would happen first, would annual interest outlays pass the trillion dollar mark, equal to the Pentagon budget (including hidden items) or would it become impossible to sell bonds and the US begin have its checks bounce. Obama seems to be leaning toward the Republican answer for this eventuality, not taxing the people who have been looting the Treasury over the past thirty years or rebuilding our economy but the adoption of  bone crushing austerity.

The tea baggers that demanded that Obama keep his hands off their Medicare will see it evaporate faster than Constitutional rights in a Bush torture camp. Obama could short circuit all of this with bold decisive leadership, that seems increasingly unlikely (try not to laugh to keep from crying). The rich can ride the economy down for years if not decades to a final state of corporate feudalism.

We appear to be entering a new, albeit weak economic bubble but it’s not likely to last into 2012. None of the fundamental problems with the economy are being addressed. The biggest problem (after a lack of tariffs) is of course the low tax rates for the rich and the insanely low capital gains tax. With a 15% tax on dividends the rich have no interest in “creating” jobs as they would if they paid a 70% tax penalty for drawing money from their businesses.

Reaganomics made the destruction of America the most profitable business you can engage in. With dwindling hard assets to sell to China and the refusal of most foreign investors to buy anymore securitized debt the only thing left is to rob the middle class of its remaining wealth.

There isn’t much middle class wealth left to steal however with 93% of wealth already in the hands of the top 20%. So the only thing left is to stop importing consumer goods or in other words austerity. This involves driving down wages and government spending that benefits the bottom 80%. If common people can only afford food and housing with no luxuries like heat you can bring in enough Yuan from strip mining the nation’s resources to take care of the rich in a style they are accustomed to. The rest of us will need to get accustomed to a life of uncertainty where offending your corporate masters or just bad luck is a literal death sentence.