Posted by Michael A. Kamperman on April 18, 2011
S&P has made a huge mistake by downgrading the outlook for the U.S. credit rating from stable to negative. We won’t waste space rehashing how they rated liar loans AAA. The fact is S&P has an agenda. They want to force the U.S. to be more aggressive in cutting its near term defict, or risk losing its cherished AAA rating. But the whole S&P charade has already backfirred. In today’s trading the dollar went up and interest rates on Treasuries went down after the S&P downgrade. This is the opposite reaction expected from their warning the chicken littles that the sky is falling. In fact, CNBC Senior Economist Steve Liesman interviewed a representative of S&P about the possible downgrade. He specifically asked if the negative outlook and potential downgrade would amount to S&P stating they believed the chance of a default on its debt by the U.S. has increased. The spokesman said yes, that’s exactly what it means. Steve Liesman proceded to ask how it is possible for the U.S. to default since it was able to print the currency it owes, making the risk of a default all but impossible. The S&P person said that S&P had reviewed history and that in fact it matters what the fiscal and monetary policies of a nation are, even one that is able to control its own currency minus some chataclismic event wiping the U.S. off the face of the earth. It is impossible to understand what S&P reviewed since no country in the position of the U.S. that owes everyone in their own currency that they can print has ever come close to defaulting. Basically, Steve Liesman pointed out on international televion that the U.S. cannot default because it can print dollars. This is the first time I have heard this clearly stated.
What will follow is a complete re-examination of the risk of the debt position of the U.S. If the U.S. can never default, then federal debt cannot be an existential threat to the U.S. If the debt is not a threat, then the deficit must also not represent an existential threat to the U.S. If both the debt and the deficit are not threats, then why is the U.S. voluntarily placing itself into a position of significant economic underperformance when it doesn’t have to? S&P has unknowingly forced the country to face the truth about its true fiscal situation. And the truth will end the mass hysteria to rush into austerity.
The country, and the global community, recently had a mass hysteria that proved to be a false alarm. That would be Y2K. Remember when everyone had to update their computers by New Years day 2000 to avoid the computers from being rendered unoperable? Anyone who said this wasn’t necessary was considered a lunatic. When the date came the sun came up the next day and computers that weren’t changed low and behold still worked. The hysteria about federal government spending and the debt level is just like Y2K, at the end of the day if we do nothing to slow the deficit and the rise in the debt, nothing will happen. Japan is in the same situation as the U.S. They owe everyone Yen, a currency they control. In 2002 S&P downgraded Japan’s credit rating from AAA to AA. So what’s been the result. Today Japan has the highest debt to GDP ratio in the world at over 200%, far higher than the U.S. Yet Japan also has the lowest interest rates in the world and a strong currency. The reason this is possible is because S&P’s ratings of sovereign U.S. and Japanese debt is a sham. Not surprisingly S&P simply doesn’t know what it is talking about. By forcing an honest assessment of out true fiscal position, S&P has greased the skids to turn away from austerity, which of course wasn’t their intention. God Bless Them.
Posted by Michael A. Kamperman on April 16, 2011
This morning I read a fascinating article about job gains in March for the Greater Waco Area. Somehow in one month we added 2,300 jobs, which is huge considering we only have 117 thousand people in the workforce. We supposedly added 600 government workers and 400 workers in education and healthcare. This seems odd since the newspaper is full of stories about cutbacks in State funding impacting numerous governmental agencies, especially local school districts. It turns out the Texas Workforce Commission used to compile the data, but starting in March the federal Bureau of Labor Statistics started doing the calculations. According to a story in today’s Waco Tribune Herald, “with this transition the BLS implemented several methodological changes to standardize the estimation across states. The use of these procedures allows the BLS to rely less on individual analyst judgement and more on the use of standard statistical methodology.” Now, its possible the TWC was not estimating Waco’s workforce properly and this represents a one-time adjustment. It is also possible the new methodology is flawed. A person (analyst) would note that government agencies and schools are cutting back employment. But the new mathematical model programmed by the BLS only calculates numbers and avoids common sense. This is the same type of modeling that was used to justify rating subprime loans AAA. The unemployment rate has dropped a surprising 1% in the last few months. Could it be the new methodology, which lacks all common sense, is the reason so many people seem to be voluntarily dropping out of the workforce in hard economic times? Afterall, if a husband loses his job and his wife stays at home, don’t most families now have two people looking for a job rather than one, or none?
Unfortunately, the economic policies being pursued by the Whitehouse invites the possibility that these “changes” are not random, but designed. The President and his political advisors know he cannot get re-elected if unemployment doesn’t fall. Yet he is pursuing job reduction policies rather than job growth policies to win over the angry middle of the electorate upset with bailouts and spending. Why? Most of the electorate is ignorant of the fact that everything would be much worse, but for the bailouts and the spending. Still, the President would rather placate them to educate them. The only response I have to the new methodology to calculate the unemployment rate is “Oh Really.”
What with $100 plus oil and the Japanese nuclear plant meltdown, a strong consensus if growing that the economy is slowing. Estimates for first and second quarter GDP are falling. At this point the stimulus plan and QE2 were supposed to achieve escape velocity whereby the economy roars back on its own without government support. Yet while that’s not happening the President has joined the ”we must have government live within its means crowd.” Sorry, but the federal government is already living within its means. The federal government has the capacity (means) to run large and sustained deficits, just like its doing now. What the President should be worrying about is how to make sure the next time something is invented in America, that it also gets made in America.
Posted by Michael A. Kamperman on April 9, 2011
The President, who has no economic soul, has moved in two short years from one in favor of Keynesian style stimulus to one in favor of Austrian style austerity. He told the Country last night that America needs to live within its means, and he hailed historic budget cuts as necessary. Hoover took the same austerity tack and look at how that worked out for him. Britain has recently taken significant austerity cuts and the economists who predicted an upswing in private sector confidence are shocked to discover an unfolding economic downturn. In Texas, our legislature is fighting over who can out Tea Party who. The result is our local Waco School District just announced they have told 200 teachers they can either resign, or be terminated for the next school year, by Monday. Headlines like these are the result of austerity. It doesn’t actually instill confidence now does it. This is what the President is congratulating Congress for doing and saying is necessary. If no Democrat challenges the President in the primaries, then the Democratic Party will simply prove that they crave power over principle. The Republican Party has left many people, including me. Ronald Reagan preached about Morning in America. He talked about what the U.S. could do. Now, our party simply focuses on what the U.S. cannot do. By stripping education funding they are forfeitting our future. By stripping mortgage funding they are laying waste to Middle Class wealth. Apparently the old saying is true: “there’s not a dimes worth of difference between Democrats and Republicans.” Where are those who believe our country has the resources to solve our economic problems supposed to turn to?
The austerity cuts have not hit en masse yet. The stimulus plan is still funding many things through this summer, then for the most part it is over. The teachers being let go won’t have a job come August. In Texas it is anticipated that over 300,000 jobs will be lost if the legislature cuts the $23 billion the House passed last week. That would increase the unemployment rate by almost 3% in Texas. All of this is on top of a Middle East that is on fire pushing oil prices past $110 per barrel. Oil will go higher as long as the political fires rage in multiple middle east countries. Also, we still don’t know the impact of the Japanese Tsunami and subsequent nuclear meltdown on parts or suppplies in multiple industries. An economic downturn looks baked in the cake for the second half of 2011 even if the Fed moves forward with QE3. If they cave, then the downturn could turn real ugly. Probably not as ugly as the post Lehman downturn, but plenty ugly.
It is all so unnecessary. It is the result of believing that our country is at risk because we owe China a piece of paper worth $1 trillion. We don’t owe anyone oil, gold, wheat, pharmaceuticals, computers, or real estate. We don’t owe anyone a single tangible asset. We simply owe paper that we can print out of thin air. We don’t even owe anyone their paper, we owe them ours in which we remain in full control. Washington is now a lot like the story of Chicken Little. Everyone is running around saying the sky is falling, the sky is falling. Panic, hysteria, over nothing. A powerful country with the wherewithal to solve its own problems shrinks in the face of fear itself. The solutions being offered are to feed our young to the foxes and the wolves. Sad, really sad. So many easily solved problems deemed insurmountable because of a deficit we could and should run. Save us Obi-won, save us.
