Posted by Michael A. Kamperman on April 25, 2010
Former Sen. Alan Simpson, R-Wyo., and Erskine Bowles, former Clinton White House Chief of Staff are leading President Obama’s deficit cutting effort known as The National Commission of Fiscal Responsibility and Reform. This Commission is nothing but a Trojan Horse that offers the allusion of one thing but will deliver another. In a noble attempt to save American finances the Commission is going to prolong the current depression for decades and kill any hope of growing our way out of troubles. The Commission will try to sell us on the virtues of paying as we go, balancing the budget, and reducing our debts. They will argue this makes us safer in the long run and will be best for our grandchildren. Balderdash! Our children and our grandchildren will suffer disproportionately from such a fools errand. They are suffering now. New York City is looking to lay-off 8,500 teachers next year. Current state law requires them to honor union seniority rules. This means almost all of the Teachers let go will be in their 20′s. It also further dims the already bleak job prospects for soon to graduate and recent still unemployed college graduates. Not to mention the children in New York City Schools will be pushed into classrooms with higher student/teacher ratios despite all of the best research showing the single biggest factor in improving student performance is lower student/teacher ratios. New York Cities plans are being repeated all around the country. It is estimated that hundreds of thousands of teachers could get pink slipped this summer. Education is the most important way to make America safer, more prosperous, and more democratic in the future, not deficit reduction. And let’s face it, in the end the Commission will call for cutting future entitlement benefits while sticking our children and grandchildren with the bill for current benefits. Count me as one who already considers anything the Commission recommends as dead-on-arrival.
The U.S. is currently spending less than 2% of GDP on debt service. To achieve a balanced budget in the current debt-induced deflationary depression would require a combination of draconian spending cuts and tax increases that would cut GDP by 10%, or more. After we balance the budget we will still have the debt and we will still be spending 2% of GDP on debt service. Communities like New York would have to cut a lot more than just 8,500 teachers to achieve these goals. We need the national dialogue to go in the opposite direction it is now heading.
President Obama should be commended for showing leadership and appointing two well meaning leaders to tackle a difficult issue. But sheep are easily led over a cliff. Having the guts to lead and the vision to lead in the right direction are two different things. The country should be going in the opposite direction. We should be lowering the retirement age for Social Security and Medicare to 60 to open up jobs for those in their 20′s with so much to give who are left to sit at home with mom and dad. We should be lowering student/teacher ratios and setting a goal for America to have the number one primary education system in the world. We should not be worrying about paying off a 30 year mortgage in 3 years when one spouse in the house in unemployed. Especially when we have a trust fund know as the Fed that can print us a check anytime we need one. Austerity is wrong for Greece and it is definitely wrong for America.
Posted by Michael A. Kamperman on April 16, 2010
In a shocking move the SEC filed civil fraud charges against Goldman Sachs. They accused the firm of deliberately stuffing subprime CDO’s with bad mortgages, selling them to unsuspecting investors, and then arranging for bets that the mortgages would fail. If true and provable, then I imagine we will finally begin seeing someone go to jail for the massive subprime fraud. For the record Goldman Sachs denied the charges and plans to defend itself vigorously. However, the immediate and semi-permanent fallout for the economy is not good. For starters, these accusations probably just put the final nail in the coffin of the securitization market. The Federal Reserve was hoping to revive this market to bring more liquidity and leverage into the credit markets. Additionally, the enhanced risk this introduces into the market should lead to a new round of further deleveraging. All of this while the Greece sovereign debt debacle remains unresolved. The whole reason the Federal Reserve needed to print money is financial firms were delevering their balance sheets and didn’t have enough money to support the needed creation of credit. So the Fed stepped in and purchased over one trillion dollars worth of mortgages. The Fed just stopped its purchases gambling the markets could handle their exit without too big a hiccup. The SEC just pulled the rug out from under the Fed.
Make no mistake the SEC is doing the right thing. We know the subprime crisis was the result of massive fraud. Life savings have been wiped out. Millions have lost their jobs. We need to make sure those who stole from others are punished. The country will not be able to move past the subprime crisis without justice.
The SEC also just made financial regulatory reform a really hot issue. Despite the suspicions of some I do not believe the charges against Goldman Sachs are politically motivated. The SEC’s action has the very real possibility of throwing the markets into turmoil and ultimately throwing millions of more people out of work. That would not be good for the party in power come election day. Clearly the Federal Reserve wasn’t in the loop when this decision was made. Despite the constant rhetoric that the economy is much stronger than people believe and that we are in a V-Shaped recovery, the truth is consumers and small businesses are still having a very difficult time accessing credit on reasonable terms. It was reported today that the states of California, Florida, Nevada, and Georgia had record unemployment rates in the post World War II era for the month of March. That was just a couple of weeks ago. Foreclosures are continuing to go up, not down. The Obama Administration has been relying on smoke and mirrors to revive the economy. We all remember the stress tests. Well where are the loans to consumers and small businesses? Where are the jobs? This was the situation before the SEC pulled the rug out on the Fed by having the courage to call a spade a spade. It took Bernanke 18 months to start quantitative easing only after the Brits led the way and shamed him into it. Hopefully the Fed will not sleepwalk for so long this time.
Posted by Michael A. Kamperman on April 15, 2010
The news reported by the Daily Telegraph is “A draft by 130 lawmakers from premier Yukio Hatoyama’s Democratic Party of Japan said the country needs a radical shift towards growth policies, calling for an inflation target above 2pc. The exchange rate should be steered to ¥120 against the dollar, from the current ¥90.” To achieve this lawmakers are directly calling on the Bank of Japan to monetize the debt to help steer the country out of persistent deflation. However, the Bank of Japan has cited the post World War II inflationary period as reason enough not to risk monetizing the debt. What the Bank of Japan is missing is the world today is awash with idle factories as almost everything except I-Pad’s and 3-D movies are over-supplied. After the war there were shortages of goods to meet massively pent up demand. There is simply no comparison between then and now. Yet the aged institutional memory of those who serve on the Bank of Japan is currently blocking the single best solution to Japan’s Two Lost Decades of debt-induced deflationary economic depression, namely massive quantitative easing known as printing money. The ruling coalition will win in time as they get the chance to replace the members of the Central Bank. This is the most important economic story in the world. The Democratic Party of Japan wants to encourage consumption. They do not believe a society that consumes less, saves more, produces more, and exports more is the key to prosperity. They have been traveling down that hard road for 20 years and now they want off.
Japan’s government debt is already over 200% of GDP, the highest in the developed world. There is really no way Japan can work hard and pay the debt back in a deflationary world. There is no other realistic way out but to print money. It will happen sooner or later. So why not let it happen sooner and save everyone several more years of unnecessary hardship?
In the U.S. we have only been in a debt induced deflationary depression for a little over two years, as opposed to 20 years in Japan. Hence our leaders have yet to move to the best solution to solve the economic crisis. Japan has moved and now looks poised to lead the way. In the U.S. our leaders are all excited about the false dawn of economic recovery. Japan’s ruling coalition has seen multiple false dawns and realizes they need to use drastic shock and awe to push the economy back into a long term growth mode. We will need to wait for an official government statistic double dip recession for our leaders to get their heads out of the sand. In Florida one in five mortgages are 90 days or more past due. One in five. The weekly jobless continue to signal no employment growth. And, the small business survey shows the most pessimism in 10 months as sales have simply not returned. Large companies have had access to the capital markets and have been able to take market share from smaller companies who have had a very difficult time accessing credit. In February consumer credit sank another $11 billion. We should not mistake an end to the Lehman Brothers financial panic and an Easter holiday a week sooner on the calendar as a sign of renewed economic prosperity. Unfortunately, no major political figure is calling for us to follow Japan’s lead. So like the Japanese we will sit and wait and wind up disappointed.
Posted by Michael A. Kamperman on April 11, 2010
You know the old saying “be careful what you wish for, you just might get it.” Well, I have been openly advocating that President Obama fire Lawrence Summers as his chief economic adviser and bring in someone who understands the economic mess we are in and understands what needs to be done to fix it. It is now apparent that the devil we know is much better than the devil we don’t know. It turns out the President is listening ever more closely to the so called wisdom of ex-Fed Chair Paul Volcker. Mr. Volcker already has floated the terrible idea of preventing banks that receive FDIC funds from participating in proprietary trading in order to make them safer. Never mind that proprietary trading didn’t cause the economic crisis and doesn’t threaten to bring down the financial system. In fact, the cause of the financial crisis has already been fixed. You cannot securitize junk mortgages, rate them AAA. and sell them. That’s what caused the crisis and that has already been fixed. What has not been fixed is the economic damage left in wake of the subprime mortgage crisis. Hence my calls for ousting Summers. But it is better to do too little as Summers has been advocating than it is to take a sledge hammer to the U.S. economy. Mr. Volcker is proposing the President do just that in the form of a VAT (value added tax).
The VAT is collected from businesses all along the production and supply chain and is eventually paid for by the consumer in the form of higher prices. Mr. Volcker wants the U.S. economy to look more like that of Germany. He wants the U.S. to consume less and export more. If you want less of something you tax it. But consumption is jobs. And hello, the one market America cannot export to is the greatest market in the world, our own. It would represent a very dangerous experiment for the federal government to try and alter the foundational underpinnings of the U.S. economy. We dare not find out after the fact that Mr. Volcker is wrong. The VAT would raise substantial revenues for the federal government and it would close the deficit. It also might double the unemployment rate.
In case you missed it the energy riots in Kyrgyzstan resulted from the government removing price supports for energy and raising the price of electricity by 100% and the price of heating with natural gas by 500%. This government was violently toppled overnight by trying to raise revenue from consumption from its own people. No doubt the need for revenue resulted from the ever tightening sovereign bond markets due to the European tragi-comedy that is Greece. President Obama has already sent us notice he intends to appoint a commission to cut the deficit after the mid-term elections. It looks like he is using Mr. Volcker to float a trial balloon with a potential VAT. Anyone who thinks the anger that seethed in Kyrgyzstan cannot seethe here in the U.S. or in Europe is kidding themselves. We already see signs of it everywhere. The deflationary depression of the 1930′s led to the rise of Hitler and World War II. While I do not in any way see a World War emanating from the economic crisis, I do see the potential for repeated outbreaks of violence and unrest. President Obama, have you really thought through all the consequences of what might happen when everyone that walks into Walmart discovers the prices went up 10% to 20% overnight?
Posted by Michael A. Kamperman on April 3, 2010
It is great news that more Americans found a job in March than lost one. That is the end of the great news. That is unless of course your a quantity-over-quality kind of guy or gal. Of the 162,000 jobs created in March, over half were temporary jobs split between the private sector and U.S. Census Bureau. The ADP report showed a loss of 24,000 private sector jobs, while the Labor Department reported a gain of 123,000 private sector jobs. Last year the Labor Department was consistenelty more optimistic than ADP. Then a couple of months ago the Labor Department revised down the number of jobs for 2009 by almost one million workers. More disturbingly average earnings declined by .1%. When coupled with the recent .1% decline in the Core CPI rate the risks of entering a deflationary spiral are rising. What has come to be known as the underemployment rate or real unemployment rate (U-6) rose to 16.9%, even though the official unemployment rate (U-3) held steady at 9.7%. The recent Gallup poll reported the underemployment rate rose to 20.3% in March, up from 19.9% in January. The difference between Gallup and the U-6 rate is probably related to questions surrounding how often you looked for work in the last 12 months and seasonal adjustments. Gallup is not anxious to find technical loopholes to exclude people from the labor force. Additionally, the number of people out of work 6 months or longer rose again and now stands at over 6 1/2 million. But the number that jumped out at me is the number of people who were forced to work part-time for economic reasons rose by 263,000 in the household survey. When the last 5 months are taken together as a whole it appears the labor force has stabilized. However, the wage declines are an indication that the quality of jobs are going down as much as it is an indication of deflation.
What appears to be happening is that as people’s unemployment benefits run out they settle for any job. It makes no sense to take a job for less than half the pay of your old job while you are collecting unemployment benefits. It makes a lot of sense to take whatever you can get when the checks stop coming in the mail and you need to find a way to put food on the table. The problem is it is not enough for our society to simply have people working. We need to have them working in good paying value added jobs. We are a society deeply in debt. As such we need rising incomes to service the debts. If incomes are declining it is much more difficult to pay our debts. If incomes are declining it is much more difficult for tax revenues to stabilize. And finally, if incomes are declining it is much more difficult to grow our economy. For despite the .1% drop in average earnings we have a long way to fall if our wages are to reach par with China where the average worker in Shanghai makes $5,000 per year. Most of these workers have no benefits, such as pensions or health care. The Chinese society also doesn’t have the percentage debts to service that the American society does.
Rather than high-fiving at the Whitehouse while strategizing with Census hiring how to have the lowest top-line unemployment number possible for the November 2010 election, the Whitehouse should take a serious look at this supposed economic miracle. President Obama should ask is the March Unemployment Report the best we can do after-all? After we spent a bunch of our $787 billion economic stimulus money? After the Federal Reserve printed over $1.5 trillion? What will happen now that the printing has ended? What will happen now that taxes will rise due to the health care bill, due to the states need for revenue, and due to the pending expiration of the so called Bush tax cuts in 2011? What will happen in 2011 when the states don’t have stimulus dollars to plug some of the shortfalls in their budgets? Where do we go from here? The President’s strategy of having the U.S. double exports within 5 years is a joke when one considers we are competing against global workers who make $5,000 per year without benefits and that have free and open access to our markets while we don’t have free and open access to theirs. The next big joke is the oppositions plan that the way to improve the economy is to reduce the federal deficit primarily through spending cuts. Why don’t we ask Latvia, Ireland and Greece how that’s working out. Our country needs to have a real long look in the economic mirror and quit spinning every economic statistic in a way to make it benefit either the Republican Party or the Democratic Party. Otherwise, like Japan we are staring at two lost decades, not one.
Posted by Michael A. Kamperman on April 1, 2010
Today is the first day in the Fed’s experiment to see if the markets can stand on their own two feet without quantitative easing. Notably the Federal Reserve purchased 90% of all mortgage-backed securities issued and backed by the federal government over the last 12 months. The Fed believes mortgage rates won’t rise much. The Fed believes the economy is strong enough to continue to improve without the Fed printing more money. By stopping quantitative easing the Fed is in effect tightening the money supply and the availability of credit when the unemployment rate remains at the highest levels in the post World War II era. If the Fed is right you can expect to see job growth return to the economy, home prices to stabilize, auto sales to rise on a steady basis, and federal, state, and municipal tax revenues to recover substantially. If the Fed is wrong, then we will see quantitative easing again. My guess is we will not only see the return to quantitative easing, but we will see it before the year ends. The fed is playing with fire and I expect them to get badly burned. The reason is the Fed is not ending quantitative easing because the economic signals indicate it is no longer needed and could in fact lead to inflation. The Fed is ending quantitative easing because of a desire on the part of some Fed Governors to return to a sense of normalcy. They are uncomfortable living in an economic world where they are asked to do extraordinary things. Generals that don’t have the stomach to make tough decisions and live with them during a war need to be replaced.
Consider that the Fed is ending quantitative easing at a time when the velocity of money remains very slow. They are ending quantitative easing when the federal budget deficit is about $1.5 trillion. They are ending quantitative easing at a time when state budgets are so out of balance that they are laying off teachers and releasing prisoners. They are ending quantitative easing at a time when one in seven mortgages are delinquent or in default and one in four mortgages are under water. They are ending quantitative easing at a time when one in five Americans that want a full time job cannot find one.
President Obama cannot replace anyone at the Fed like he could replace a military General. Yet the President can stack the deck at the Fed with people like Janet Yellen who understand we are living in abnormal economic times. Someone that understands the Fed needs to target unemployment more than inflation in the current environment. There are two other openings on the Fed besides the Vice-Chair and the President needs fill them promptly with Fed Governors that have the stomach for the economic struggle we are in. The President’s only option to repair the economy is additional quantitative easing. He has backed himself into an economic corner by focusing on the deficit and not on unemployment. He has backed himself into a corner by prematurely pulling out of bipartisan negotiations on health care costing him the Senate seat in Massachusetts and a filibuster proof super majority in the Senate. The bottom line is the President simply cannot get another major stimulus bill passed through the Congress. Hence, quantitative easing is his last and best hope to avoid going down in history as the reincarnation of Herbert Hoover.
