Thursday, July 28, 2011

The Concession Stand is Open

Initial jobless claims have been trending down for several weeks since Obama’s declaration that he and our allies would release as much oil from strategic reserves as necessary to break the price increase spiral. And last week the number of claims dipped below 400,000 which is considered the threshold of significant job creation. This coupled with some good numbers from the sluggish housing market would indicate the economy is back on a recovery path again.

That is except for the Keystone Kops movie playing out on Kapitol Hill. Having started the car headlong toward the cliff, the tea baggers have yanked off the steering wheel and they and Speaker Boner are fighting over it. The heroine, also know as the world economy, is tied up with a huge amount of rope and riding in the trunk. Meanwhile the Senate Democrats in their blue uniforms chase behind waving their Billy clubs, and President Obama wearing his large Chief’s badge stands at the edge of the precipice giving the hand signal to stop while wildly blowing his whistle to no avail. (well, for Obama it’s “wildly”)

The corporate media is starting to play up the idea that these damn fool tea baggers could really crash the economy. (the media likes a good train wreck)
The stock markets have been going down for the past week but hardly a crash so far, retail investors (people with their own money) have been bailing out for months. Fund managers have been not so quietly moving to cash and today they have begun the wholesale dumping of Treasury bonds but just the ones that will come due in August. This has driven up the interest yield 7 basis points. That sounds like a lot but is only 0.07%, still when you’re talking billions of dollars it is real money.

This bond sell off is also mostly a tempest in a tea pot since they have no problem selling them. My guess that people in the know are buying bonds at a discount planning to sell them at full price to the Federal Reserve if the Treasury really refuses to redeem them.

US Treasury bonds are still selling cheap compared to historical rates with short term debt only yielding 2% and we are doing far better than some European countries where things are clearly getting out of hand. Not that Europe is having terrible economic problems, in general their economy is good with low unemployment, but they have a banking problem. Europe got suckered by their bankers (and ours) and the people who said the Euro was never a good idea have turned out to be right.

All this mess in the EU is keeping the USD strong or we would have much more obvious problems. This doesn’t actually mitigate the crisis and it makes our problems the world’s problems. China is not happy of course and is the real wild card in all of this.  “No Drama” Obama is going to need to convince China that they don’t want to rock the boat.

There has been speculation as to what the “October surprise” might be that the Republicans will use to swing the 2012 vote if they don’t think good old fashion election fraud will do it. One possibility is the Republicans will convince China to invade Taiwan which would also result in the immediate embargo of most consumer products coming into the US. This would play to the fears of the average voter and really hit them where they live with empty shelves at Walmart.

So even if Obama manages to keep us from going off the cliff this time, there are still endless opportunities for the Republicans in the next reel. Buy the extra large popcorn, it’s going to be a “dark comedy” marathon.

PS   When you’re God’s chamber pot…  A small storm about 40 miles in diameter parked itself over Dubuque Iowa and deposited up to 14.5 inches of rain overnight resulting in over a million dollars in damages and raised the Mississippi River by three feet. Normal annual rainfall in the area is less than 30 inches. This is the second bizarre weather event in Iowa in less than a month with a previous storm producing 135 mph straight line winds doing massive damage to buildings, trees and crops along a 15 mile wide path across four counties. Either the Gay Marriage or global warming.

Rainfall totals

Tuesday, July 26, 2011

Flying the friendly skies, bring your own Golden Parachute

We are less than a week away from the United States of America becoming the biggest deadbeat of all time, and the rhetoric coming from the right is getting thick. The Republicans are simultaneously running two opposing talking points (sometimes from the same people): one is that Obama is destroying the economy by allowing the nation to default, and they are also saying that nothing is going to happen if the Republicans don‘t extend the debt ceiling and we do default. It depends on who they are trying to frighten at the moment.

Clearly Obama has decided to ride it out. At this point the only thing Congress could hope to pass would be a clean bill to raise the debt limit, because there isn’t time to write up any spending cuts. The corporate media is spreading the rumor that Obama would accept a 30 day extension, but they’ve been consistently wrong so far.

What would default really mean? The tea baggers keep saying that there is plenty of money to pay the interest on the debt and of course they don’t know what they are talking about. Mature T-bills and government bonds don’t pay interest, they are due and payable in full. Congress could authorize extending them except for that pesky 14th Amendment and there are Supreme Court rulings on this, in short the ruling was “pay up”.

This also obligates Obama to pay them but a bond holder would have to go to court to force him to do it. On a practical note, the mature bonds would likely be bought up by the Federal Reserve in the interest of not crashing the economy. The Fed could refuse to do this however because nobody can tell them what to do. The majority of economists polled this week say that the US will lose its AAA credit rating, but these are the same economists they poll every week and they are almost always wrong.

If Chairman Bernanke were to go ahead with buying expired bonds that would stave off a government shutdown for awhile as this would cover a big slice of the budget crisis. Obama would still need to cut spending and would by virtue of the emergency he would have something that no President has ever been able to get his hands: a line-item veto. That big slab of pork the Republican cronies back home have been chewing on could be yanked out of their mouths so fast that they could lose teeth.

The Fed option seems likely as the Chinese were being briefed a couple of months ago on the practical aspects of guarantying international transactions with cash instead of using T-Bills as collateral. The Fed issues all the cash so they can make plenty of that available. It’s good to know the big corporations and China will be just fine.

Things won’t be just fine for the rest of us however. You can expect interest rates to spike, but there again the Fed should be able to intervene, not that success is assured. Then there is the downward pressure on jobs. Rumor is that July and August will see big layoffs from the “job creators” with over 40,000 planned layoffs already announced in June.

We could see upwards of a million jobs lost in a default crisis, according to some estimates circulating in the business news. This would happen if the major corporations see credit tighten suddenly in the Repo Market, and already slow consumer spending starts to collapse the demand for goods. Private sector layoffs, combined with government spending cuts, and even more public worker layoffs pushed by the Republicans would make this a self-fulfilling prophecy.

More on the Repo Market: “repo” is short for Repurchase Agreement, or really a sort of short-term loan contract secured with some sort of collateral. A Repo can usually can be cancelled overnight by either party. Big money is tied up in Repo’s and it was the use of these by dodgy Wall Street banks in 2008 that finally triggered the crash. This could again be the flash point for an economic collapse.

Concerning the rightwing talking point that “we can’t tax corporations because they just pass it along“: Because anti-union legislation embedded in the FAA budget passed by the Republican House failed to clear the Senate, the FAA has stopped much of its operations including the loss of its tax-collecting authority. Federal taxes amount to about 10% of a ticket’s cost and airlines include it in the price without disclosing it. The tax ended, but the airlines simply kept ticket prices the same; capturing the money for themselves raking in $30 million a day. Money that won’t be going for new airport runways or aircraft safety, things the right doesn’t want for us anyway. Airline CEOs can use it for bigger golden parachutes so they’ll be safer flying in their private jets. Some people say you as a ticket buyer are entitled to a refund but I wouldn’t hold my breath, in the “free” unregulated market they can charge you as much as they want.

Monday, July 25, 2011

Predicting fires

Well, the markets didn't crash today and the conservatives point to that as proof nothing bad will happen if they destroy the government. Of course the markets don't believe the Republicans will really allow it to happen or if they do the markets still believe that Obama will save the country by invoking the 14th amendment.

But just because the markets didn't crash today doesn't mean they won't. The markets are in a bubble, the economy is hollowed out too much to support the markets. Predicting a market crash is impossible, much like predicting a forest fire. You can expect fire when there is a drought but you don't know when or if it will rain first. You know the longer fire conditions exist the more likely that somebody stupid or malicious will start a fire. There are plenty of rightwingers who like to play with matches.