"Austerity" the New Big Lie

In G-20 Moves Toward Deficit-Tackling Targets, With Flexibility, Bloomberg.com perpetuates the lie that the giant continued deficits of numerous countries have anything to do with belt-tightening. From the article:

“It is draconian, a little difficult, a little exaggerated,” said Brazilian Finance Minister Guido Mantega. “Some countries would not be able to do it. It is clear that a cut is needed, but at what velocity? It can’t be too fast.”

The officials said the G-20 statement today will echo an agreement reached by finance chiefs in Busan, South Korea, earlier this month.

The agreement would effectively endorse the austerity plan set out by the U.K., . . .

Here is the Financial Times going along with the Big Lie in Osborne gambles on pain to survive the pain:

Where does all this austerity leave Britain compared with other countries? If the establishment is right and the economy recovers smartly, Britain is now projected to enjoy less than half the level of borrowing in 2014-15 of other advanced economies in the Group of 20.

Its accumulated gross debt would also be lower. The International Monetary Fund recently estimated that advanced G20 countries would hit 2015 with gross public debt rising to almost 120 per cent of national income. The equivalent figures in the Budget show Britain’s gross debt burden peaking at 86 per cent in 2012-13 and then falling well below the G20 average.

This austerity plan projected large national deficits year after year, only falling to 2% of GDP 5-6 years from now.

None of this has anything to do with austerity. The IMF has frequently imposed real austerity on countries. This involves running governmental surpluses. All that is being talked about here is that unprecedented peacetime deficits will be run next year, the only larger peacetime deficit being run currently.

There is no secret as to the incessant media use and acceptance of the politicians promotion that these policies are austere. It is of a piece of the even more damaging Big Lie coming out of the financial crisis that the governments were forced to run these big deficits to save the system or save the economy. Of course, the bailouts were in essence transfers of wealth from society at large to stakeholders of (mostly giant) financial institutions: employees, stockholders and bondholders.

The non-governmental beneficiaries, namely Big Finance and its acolytes, continue to benefit from deficits. Larger deficits mean more business selling and repackaging government debt, with the important side benefit that much of said debt goes to supporting existing debt that can then be traded. More complexity means more experts to analyze said complexity, and so on.

And then when Greece or Spain gets in trouble, that means yet more business for Team Finance.

Sometimes debt is necessary. Examples would be a war for national survival or major capital spending to create durable future benefits, such as a major dam or bridge. Examples where debt is the wrong approach involve spending for predictable long-term social situations such as an aging population. It's fine if society agrees to expend more effort on the health of retirees. Because there is a negative multiplier effect from such effort, this effort simply should be paid for out of current income (or liquidation of accumulated assets if that is really desired), but for highly indebted countries such as the U. S. and the U. K. to continue to borrow for social benefits has nothing to do with austerity.

We are in a Wonderland world where words mean what the Big Finance/governmental alliance mean whatever they want them to mean.

Copyright (C) Long Lake LLC 2010

Proof that a Nobel Prize Does not Save One from Spouting Establishment Nonsense

In today's NYT column Fiscal Scare Tactics, Paul Krugman attacks the Obama Federal deficits as being too small. Now that Dr. Krugman is a member of the elite G30 group, he's worth paying increased attention to. Let's dissect his column.starting with the second paragraph:

Many economists take a much calmer view of budget deficits than anything you’ll see on TV. Nor do investors seem unduly concerned: U.S. government bonds continue to find ready buyers, even at historically low interest rates. The long-run budget outlook is problematic, but short-term deficits aren’t — and even the long-term outlook is much less frightening than the public is being led to believe.

First, notice the rhetorical device: "many economists". What does that mean? Not much. Many people believe in astrology. There are "many" Wiccans. Next: yes, Govvies find ready buyers. What of it? So did subprime mortgages, only months before there were no buyers except at sharply discounted prices. He differentiates between short-term deficits and some other type. What does that time frame mean to him? Farther down the column, he lets us have the details:

But there’s no reason to panic about budget prospects for the next few years, or even for the next decade. Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they’ll have risen to 3.5 percent of G.D.P. How scary is that? It’s about the same as interest costs under the first President Bush.

Dr. Krugman would have us believe in official predictions a decade out! Not just that, he tilts toward yet larger deficits:

. . . deficits should be bigger than they are because the government should be doing more than it is to create jobs.

He blames all this on a vast right-wing conspiracy of hysterics:

Why, then, all the hysteria? The answer is politics.

In one column, he multiple times uses such terms as "hysteria", "panic", and "groupthink" to describe those who oppose the deficits he fears are just too small.

Presumably he forgets that Bush I's deficits (related to the S&L bailout) led directly to the Perot movement, the Bush I and Clinton tax increases, failure of an expensive healthcare reform proposal (which of course failed politically for many other reasons), and the famous alleged budget surplus with which Democrats vigorously criticized the deficits of Bush II. Now let's see. After the famous "jobless recovery" which allowed Bill Clinton to win in 1992 by running on the economy even though the recession technically had ended about 18 months before the election, Congress and the President responded to public "hysteria" about deficits by shrinking them. How did the economy do in the Clinton era? Did it create jobs?

You bet it did.

Were these Government jobs?

For the most part, no.

Beware economists saying that those who disagree with them are playing politics. That's one of the rallying cries of political partisans.

Is worry about Federal deficits hysteria? No.

Is worry about excessive debt in all sectors of the economy--public and private together--misplaced. I think not.

Is (say) 4% of GDP going to Federal interest payments affordable? Yes.

But if Federal revenue is 20% of GDP (larger than its average over the past 20 years), then a gigantic 20% of such revenues go to interest payments. And that number excludes state and local debt payments, plus all private sector debt payments.
And it excludes the much larger rolling-over of principal if Federal debt continues to be short-term for the most part.

The existence of Federal debt with heavy repayments is potentially deflationary. The usual means of paying it is to debase the currency.

Right now, the financial markets are "correcting" by gunning for those who have been short the U. S. currency and long alternatives such as the Aussie dollar and gold, general commodities, and stocks (especially speculative ones). One gets the anomaly of reading that worries about sovereign debt are moving these markets.

But in normal times, worries about sovereign debt imply a move to gold, not selling thereof to buy increasingly abundant U. S. government debt.

While gold may or may not look to have been overpriced from some future time frame, it will not be said to have been in a bubble unless India suddenly casts away thousands of years of tradition and decides that gold is worthless, but paper money and electronic promises to pay are durable, reliable forms of wealth to pass down from generation to generation.

Gold owners and traders may enjoy the following column, which shows the several sharp corrections in the price of gold with the past decade's bull market: http://www.kitco.com/ind/degraaf/feb022010.html

While public spending advocates such as Dr. Krugman ignore the fifty or sixty trillion dollars of unfunded Federal liabilities for Social Security and Medicare alone, and while his friends in the White House carefully exclude hundreds of billions of current expenditures on Fannie Mae and Freddie Mac from budget calculations, the people of the world are not so easily fooled. They know wheat is for eating, chaff is for discarding, gold is forever, and that Dr. Krugman, one of the anointed G30 members (I remind you) is ultimately just an apologist for Big Finance and the quiet coup of Simon Johnson. Why do I say that?

Back to the column:

. . . well more than half of the deficit was caused by the ongoing economic crisis, which has led to a plunge in tax receipts, required federal bailouts of financial institutions, and been met — appropriately — with temporary measures to stimulate growth and support employment.

Here's the Big Lie that is slipped into all this sort of mainstream commentary. No, the financial crisis did NOT require bailouts. The bailouts were a choice. A bad choice. The better choice was to require bondholders of the weak companies to come to the aid of their investments, such as by converting bonds to stock (as was proposed for GM and I believe CIT, though memory has become hazy about the details of those disasters). The bailout of the bondholders is a scandal of historic proportions.

The Small Lie in the above statement is that deficit spending really does "stimulate growth". Not so. Look at the miserable employment picture since the deficits exploded, and contrast that with the growth of the 1990s (and 1950s under Eisenhower).

I'll take Tall Paul over Short Paul any day.

Deficits do matter. Borrowed money had better be used well (such as to win a world war). And the private sector really can provide jobs. Paul Krugman shoud channel the '90s, not the '30s. And so should Barack Obama. That would be a change most Americans could believe in.

Copyright (C) Long Lake LLC 2010

A Pre-Travel Screed

One final comment before taking a day or two off for travel.

Yahoo/Finance reports that Jim Cramer says to ignore the comparison of the U. S. to Japan.

EBR agrees.  The financial position of the U. S. consumer is vastly worse than that of the Japanese, who have been net savers throughout their 20 year post-bubble experience.  Thus, Japanese consumers are not financial serfs to financial companies, unlike Americans, who have been successfully and deliberately marketed by the Merchants of Debt to transfer most of their equity in their most important and long-term stable financial asset, their personal residence, to financial companies to finance either current consumption, more debt, speculative investments, and the like.

When evaluating Barack Obama's post-100 day performance, please recall that companies and even governments that were marketed "AAA" collateralized debt obligations based on these mortgages by Big Finance have written these securities down to fair value, with fair value often being zero or close to zero.  The Citigroups of the world that created and marketed these same securities financed their growth and their bonuses with this garbage and are specifically and self-consciously overpricing them at near 100 cents on the dollar, and Barack Obama and his party that controls Congress is doing what even George Bush and Henry Paulson shied away from doing, which is going along with this obvious falsehood and misusing the Fed and the FDIC to have hedge funds and even these same Big Finance companies purchase this debt at inflated prices.

It is the transparency of the lie that these "legacy" securities are "illiquid" and therefore in need of your funding that has led the blogger Yves Smith of Naked Capitalism to say that Team Obama engages in the "Big Lie" technique.

It may be quixotic, but I for one am rooting for the failure of the PPIP and the failure of an economic recovery if it is built upon a Big Lie.  

The banking predecessor to Citigroup led the financial abuses of the late 1920s.  Citigroup is the worst big "bank" in this cycle.  The best thing for America would be for Citi to die and the bondholders of the troubled banks provide the bailout funds they need rather than taxpayers.

Copyright (C) Long Lake LLC 2009 

More Fed Data Demonstrating 'Lack of Lending' is a Lie

In a non-proprietary E-mail message sent today, Bob Eisenbeis of Cumberland Advisors addressed the recent WSJ article alleging that TARP recipients have not lent their government-provided funds out.  This blog has no expertise in that argument, but notes with extreme interest the conclusion of the message, which is titled, simply, "Bank Lending".  Here is the intro and the (more relevant for our purposes) finale:

In an article this Monday the WSJ reported that lending by banks that had received TARP funds had continued to decline since the inception of the program and that this “paints [a] starker picture than official government snapshots.”  The article focused almost exclusively on the recently released loan origination data by Treasury on lending by major TARP recipients, but failed to consider other information in the data set or more current data on bank lending provided by the Federal Reserve. . .

When one (reviews) data from the Federal Reserve's H.8 release on bank lending, which is now available through the month of March and into the first week of April, overall bank credit is currently only slightly below what it was at its peak in October of 2008, which was nearly one year into an economic downturn.  More importantly, given the severity of the downturn, lending is still substantially above where it was at the start of the recession or any month prior to the peak in October 2008.  This is true for virtually every single type of credit, be it real estate lending, consumer loans, or C&I loans.  In short, whatever retrenchment that has taken place in the TARP institutions in the C&I loan or credit card areas looks to be a rather recent phenomenon and seems to be relatively minor when compared to the volumes of outstanding credit currently being provided by the banking system as a whole.

Assuming that Dr. Eisenbeis' interpretation of the lending data is en pointe, several conclusions occur.  One is of course that there is enough lending going on, and perhaps too much for a "normalized", sustainable level of economic activity.  Other conclusions of course relate to various explanations for the need to transfer taxpayer wealth to Big Finance.

One suspects that just as the 2001 recession and bear market in stocks was minimized by excessive debt creation, the authorities are trying to do the same with this worse "recession".  The suspicion here is that this strategy is dealing with a sicker patient, so that the remedy will likely be less affected; or an addict who is now more tolerant of (resistant to) the addicting substance.

What the economy really needs is another new new thing.  In the past this has been the wave of consumer goods in the 1920s, victory in World War II, better living through chemistry in the 1950s-60s, disinflation in the 1980s, and the Internet etc. in the 1990s.  Eventually, perhaps green energy could help fill that bill, but that's far from a 2009-10 situation.  Until then, one should be skeptical that more of the same will do any more than another drink will do for an alcoholic.

Copyright Long Lake LLC 2009

G20 Provides an Excuse for the Stock Market to Rally While Truly Good News Remains Scarce

Now that the London G20 meeting has ended with filet mignon for lunch in honor of the billions of poor people in this world and the numerous unemployed and newly homeless in the "rich" world, the stock markets have been partying while both the real economy and the financial world continue to deteriorate.  There's no business like the money-printing business! (Unfortunately, it's more addicting than alcohol.)

In the real economy, microscopic month-to-month alleged improvements in business are cheered while massive year-to-year changes are ignored.  For example, while the Labor Department headlined that new orders for manufactured goods in February rose 1.8% from January (seasonally adjusted), it minimized that shipments fell 0.1%  and buried on page 2 that year on year, shipments were down 18.6% and new orders were down 23.1%.  Recalling that manufacturing has been in a downturn for some time, this is not good news and has no predictive value that any upturn is in the offing, and if it is coming, how long and strong it will be.

Regarding the continued dismal new and continuing claims for unemployment, Wall Street is as usual schizophrenic, both loving "slack" in the labor market but wanting more consumption.

In a cravenly concession to Congressional pressure, FASB today relaxed the mark-to-market rules for financial institutions.  The Big Lie here is that the CDOs and other securities that are allegedly "illiquid" were of course designed to be traded- that is their entire raison d'etre.  Big Finance simply does not like the market price, though whenever it can foist these or any other securities off on a buyer- preferably the uninformed public a la 1999, it is a big fan of "free market" pricing.  So a complaisant administration and Congress cow FASB (with what implied penalty?) into changing nothing except appearances.

(Let us recall that because Citi et confreres needed saving, last year FASB delayed its requirement that off-balance sheet items had to come on-balance sheet.  Will that delay be repeated?)

The whole valuation exercise of mark-to-market or mark-to-fantasy is a sham.  The idea that a publicly-0wned company can put its own valuation on any assets is immoral and should be illegal.  An independent third party auditor (or two) should value these assets.  They can use predicted cash flows and market values, and both should be disclosed.  If the financial institution does not like that, it can go private.  More broadly, why should a depository institution that accepts FDIC insurance put complex securities on its books?  Let's bring back Glass-Steagall or its equivalent and let the investment bank, not the depository bank, gamble on that sort of stuff.

Meanwhile, criticisms of the PPIP bail-out continue to surface, in Business Week, out of brokerage houses, in the WSJ, out of academia, etc.; one wonders if this transparent giveaway to Pimco and Blackrock will actually go forward.

We need to go back to the situation that prevailed in the U. S. in the 1950s, when high-quality stocks had high yields, there were dozens of AAA-rated corporations, high-quality government bonds had low yields, Glass-Steagall served us well, bankers followed the 3-6-3 rule (borrow at 3%, lend at 6%, and be on the golf course by 3 PM), the Federal Government's debt's share of GDP shrank dramatically, individuals carried little debt, and once the shooting stopped in Korea, the U. S. stayed away from involvement in foreign wars.

America is being drained just as all prior empires have been, from unproductive but over-influential money-changers, dealmakers and pencil-pushers at home and by military adventures abroad.

This is why despite a massive rally, the stock market remains at least 10% below its 2002/3 low in real dollars (the only kind) and living standards have been stagnant to down for most Americans for years despite the inexorable march of science and medicine forward.

Copyright (C) Long Lake LLC 2009