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The US Debt Default Nobody Wants — Except Us!

September 30, 2013 by · Leave a Comment 

The Daily Reckoning

After recovering from a losing streak in the middle of last week, the Dow fell again on Friday – down 70 points.

What’s up?

Who knows? When Mr. Market wants to do something he doesn’t need a reason. He doesn’t ask permission. He doesn’t give any ‘forward guidance’. He just does what he wants.

But the reason all the commentators are talking about is the looming clash in Washington over the US debt ceiling.

We didn’t read about it in any detail; it seems trivial. But if Congress doesn’t get off its collective butt and pass another law the government will have to shut down. That’s because a previous law requires the Federal Reserve to stop borrowing when they reach a certain limit.

According to the Financial Times over the weekend: ‘Shutdown looms over budget‘.

As near as we can make out, everyone is in favour of seeing the feds continuing to spend money they don’t have. The fight is over what to spend it on. The Republicans want to stop spending on Obamacare. The Democrats want to spend on everything.

Unless they can agree, spending will stop on almost everything.

Here’s another headline: ‘The Default Nobody Wants‘.

That is surely incorrect. We would be delighted with a default. It’s precisely what should happen.

Congress spends more than it brings in by way of taxes. It has done this for years. In a rare moment of clarity, it saw the handwriting on the wall and vowed to stop. It set a limit on how much debt the government could take on. The Federal Reserve will reach that level soon. So the borrowing should stop.

We’d like to see it happen. Not so much for the financial health of the nation. We’d just like to see the looks on their faces – all those zombies suddenly cut off from fresh blood.

But wait. Who are we kidding? This is like a fat person who has decided to hold the line. He watches his weight inch up. He resolves to stop eating so much when he hits 250 lbs. He feels good about himself for having taken such resolute and forthright action. Now he has his weight under control, right? His wife should be proud of him.

Then he hits the magic number. ‘Oh, my…’ he says.

That evening the dessert is passed around. He begins to think: What’s so special about 250 lbs? Why not 260 lbs? Or 270 lbs?

He could not eat the dessert. But it’s his favourite chocolate cake. So, heck, he changes the resolution! He’ll eat the cake. But starting in the New Year, he will bring his weight down to under 250 lbs again.

Congress has the nation watching. Everybody wants a piece of chocolate cake!

The military-industrial complex Ike warned us about wants more planes, more drones, more tanks, more snoops, more contracts, more retirement benefits – in short, more money. So does the education industry. And the healthcare industry. And the poverty industry. And all the other industries that have put the government in their pocket.

And what about all the retirees? Haven’t they earned their Social Security? Don’t they have a right to Medicare?

Yes, everyone thinks he has a need…and a right…to a piece of cake.

So, what to do?

Pass another resolution!

Besides, the deficit is going down. There’s nothing more to worry about. As a percentage of GDP, it’s only 5.7%. That’s well down from the levels of 2009-10.

Wait a minute. What kind of flimflam is this? Colleague Simone Wapler points out that expressing debt as a percentage of GDP is nonsense. GDP is the income of the whole nation, not the income of government.

It would be like telling people that your excess spending was equal to only 2% of the income of the people on your block.

The US government doesn’t have everyone’s income to draw on for debt service. It only has its own tax revenues. Deficits only make sense in relation to the resources available to pay them. In the first 11 months of the fiscal year, the feds had record income of $2.4 trillion. But they spent $3.2 trillion…or one-third more. As a percentage of its own revenues, the US government deficit is running at 33%, NOT the 5% people are talking about.

The spectacle is vastly entertaining, provided you’re not hooked on the cake. That’s why the best place to watch this farce is from the sidelines…well away from the action. Out of stocks and bonds, that is.

But is there any real chance the feds will default?

Maybe they will do a symbolic default. One side – Democrats or Republicans – will try to gain some partisan advantage from it. But the system works by paying off zombies to retain political power. There is no way it will come to an honourable or voluntary end.

Instead, it will come to a bitter end – when the feds really do run out of money and are unable to get any more.

When will that happen?

Wish we knew. It could be many years in the future. For the moment, their credit is still good. And they have a willing central bank backing them up too.

Regards,

Bill Bonner
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

From the Archives…

The Fed Does the Reverse Volcker and Targets the US Unemployment Rate
27-09-2013 – Greg Canavan

How Much Juice can Australian Property Have Left?
26-09-2013 – Greg Canavan

Nothing Lasts Forever…Especially Easy Money
25-09-2013 – Chris Mayer

The Unintended Consequences Brewing Thanks to the Federal Reserve
24-09-2013 – Greg Canavan

The Market’s Declining Response To ‘Open Mouth’ Operations
23-09-2013 – Dan Denning

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US Government Shutdown Threatens Panda-monium

September 30, 2013 by · Leave a Comment 

The Daily Reckoning

All hell broke loose last night. The government shutdown in the US suddenly ‘got real’ and there was uproar across the country. One commentator suggested releasing giant pandas ‘into congress, let them maul [the politicians] out of office and then [the bears] shall run our government.‘ 

We’re not a fan of mauling, but we couldn’t agree more with the idea of having giant pandas running a country. Politicians that do nothing but eat bamboo leaves and poo would be a significant improvement.

Anyway, the uproar about the US government shutdown had nothing to do with unpaid bills, debt defaults or jobless civil servants. It was all about pandas, according to the Wall Street Journal. Hence the comments above.

You see, it turns out that the operators of Washington DC’s National Zoo ‘panda cams’ are somehow employed by the Federal Government. They are deemed ‘nonessential staff’ and were told not to come to work today because of the budget crisis. The result is that you can no longer see live pictures of Mei Xiang and her newborn cub when you visit the zoo’s website.

And that’s why all hell broke loose. It was as though the internet’s heart skipped a beat. Twitter, Facebook and the blogosphere erupted in unison. People offered to work for the zoo for free, urged politicians to give up on Obamacare, which is causing the US government gridlock, and pledged to support anything else that might turn on the panda cams again.

We’re not sure why webcams need ‘operators’ in the first place, to be honest. It sounds like one of those public servant jobs in Greece where street sweepers can work from home. But you’ve got to hand it to the zoo’s management team. They really know how to play the voters. If Kevin Rudd had pledged to put a panda cam on the big screen at Federation Square in Melbourne, he would’ve won the election.

All this illustrates the point about declining empires we made yesterday. The emperor is temporarily defunding the bread and circuses that keep the ‘plebs’ happy, just to remind them who’s boss.

Wall Street’s version of the panda cam is also being cut thanks to the government shut down. Bloomberg reports that the jobs data set for release on the 4th of October won’t be released if the government remains shut down until then. If you think taking pandas away from the plebs is bad, just wait until the financial elite don’t get their jobs report. How will the stock market jump or tumble without jobs data? What will their algorithms trade on? How will anyone make any money? You can’t front-run a report that won’t be released.

Worse still, how will politicians justify running a deficit or implementing austerity if they can’t refer to the number of jobless who need their help?

Strangely enough, a lack of economic data is just the solution according to John Cowperthwaite. Here’s an excerpt from The Money for Life Letter which explains what usually happens when the government is disarmed of data:

Sir John James Cowperthwaite was a Scottish born economist. After the Second World War, British officials wanted to find a way to boost the Hong Kong economy in this new post war era. They hired the Scotsman and after some investigating and number crunching, he found something startling. The Hong Kong economy was doing just fine. And the more he witnessed the economy functioning on its own, the more he insisted the government stay out of it.

The British governors of Hong Kong gave Cowperthwaite free reign over the economy for many years because of his persuasive and rambunctious style. Instead of trying to stimulate, regulate or subsidise the economy, Cowperthwaite did something shocking. He stopped collecting economic statistics. Why? ‘If I let them compute those statistics they’ll want to use them for planning.’

In other words, Cowperthwaite figured out that without any statistics to obsess over, the temptation to constantly tinker with the economy would be minimal. While the rest of the world began regulating, subsidising and protecting their industries, Hong Kong surged on unrestrained.

Cowperthwaite went even further than not collecting statistics. The few economic policies he did implement were kept intentionally ambiguous. Cowperthwaite was asked about his currency policies and explained that even the management of Hong Kong’s banks, which implemented the policy, didn’t understand them. ‘Better they shouldn’t. They would mess it up.’

Cowperthwaite’s lack of intervention, constant battles against intervention and refusal to even allow interventionists to misinterpret economic data turned Hong Kong into one of the world’s most influential economic success stories. Cowperthwaite was knighted and took his place in the history books. There’s a bronze statue of him somewhere in Hong Kong.

Now I’m sure Hong Kong’s growth wasn’t without interruption. I bet even Usain Bolt falls over occasionally. But, disarmed without the statistics to hound politicians, lobbyists and populism never managed to goad Cowperthwaite off his free market policies. There were no $1000 stimulus cheques, school hall building schemes or pink batts. People got to keep their income because taxes stayed low and government debt wasn’t an issue.

So maybe a government shutdown isn’t a bad thing. People might get some work done instead of fawning over giant pandas. The government might stop meddling because it can’t justify its intervention. And the economy might grow until it balances the budget.

We’re just daydreaming of course.

Today the lack of positive data has become a reason to continue interfering with the economy instead of leaving it alone. Bernanke’s tapering of QE was delayed to wait for more signs of a strengthening economy. He won’t be getting those in the jobs report on the 4th of October then. If the budget impasse continues and there is no data at all, who knows what the Fed will come up with. Actually, we do know; more money printing.

The good news for stock markets is that the Federal Reserve isn’t part of the Federal Government, unlike the panda cams, so QE will proceed as per normal while the rest of America faces life without giant pandas on demand.

Given the lack of consequences of a government shutdown, except for the lack of giant pandas, it’s interesting that Panda-monium in the US can move the Aussie stock market so much. It was down more than 1% yesterday. There’s a government crisis in Italy too, mind you. And disappointing manufacturing data came out of China – nothing to do with giant pandas apparently.

But what you should really be watching, now that the pandas are unavailable, is the 10 year US Treasury bond yield. Yes, we know that sounds abstract and academic. But consider this.

For now, all these crises around the world are causing large countries’ government bonds to rally, as they usually would in a crisis. Eventually, the bond market will figure out that the coming crisis it’s worried about will hit the bond market itself, not just the stock market and the economy. It’s government that’s in financial trouble this time around. That means the traditional safe haven will become the centre of a financial crisis. Bond prices will tumble instead of soar as they usually do in a crisis.

There are few places to park your money safer than government bonds. Buy gold.

http://s.wsj.net/public/resources/images/OB-ZC344_panda_E_20130930161747.jpg
Source: National Zoo

Regards,

Nick Hubble+
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

From the Archives…

The Fed Does the Reverse Volcker and Targets the US Unemployment Rate
27-09-2013 – Greg Canavan

How Much Juice can Australian Property Have Left?
26-09-2013 – Greg Canavan

Nothing Lasts Forever…Especially Easy Money
25-09-2013 – Chris Mayer

The Unintended Consequences Brewing Thanks to the Federal Reserve
24-09-2013 – Greg Canavan

The Market’s Declining Response To ‘Open Mouth’ Operations
23-09-2013 – Dan Denning

Similar Posts:

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There is some foolish money swirling in the real estate market.  In particular, there is a growing flood of small time investors trying to enter the market at a turning point and others are simply looking for a quick way to make a buck.  It is amazing how many people are waiving inspections just so […]

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Traders may take sell position near 6420 with the stop loss of 6450 for target near 6380 and 6350. and nbsp;Crude oil futures for October delivery on Multi Commodity Exchange (MCX) was seen trading down by 0.19% at Rs.6428 per barrel as of 16.30 IST on Tuesday. and nbsp;

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India NCDEX Crude Oil trade touches 2 90 lakh barrels in September 2013

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ArcelorMittal, Sider sign strategic agreement on Algerian operations

September 30, 2013 by · Leave a Comment 

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Official: GM China shows off electrification efforts with wide range of e-powertrains

September 30, 2013 by · Leave a Comment 

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GM China shows off electrified vehicles in Shanghai

As of earlier this year, China is General Motors‘ largest new vehicle market, as measured by new model sales. Given the company’s focus on electrification, it makes sense that GM would want to show off some electrified vehicles there. That’s just what happened as an “electrification workshop” in Shanghai, recently. And in true GM form, a different make nameplate represented each powertrain type.

In China, “mild” hybrids are represented by an updated version of the Buick LaCrosse eAssist that will go on sale in China in October. The improvements to the model, which debuted in China in 2011, include an increase in highway fuel economy to about 45 miles per gallon. Then there are the “normal” hybrids, represented by the Cadillac Escalade Hybrid, and the world-famous Chevrolet Volt was, of course, the extended range plug-in of choice. Finally, GM China is showing off the Sail Springo electric vehicle. That model, first unveiled in concept form in late 2010 and officially named late last year, has an 80-mile single-charge range and a top speed of 80 miles per hour.

GM China’s vehicle sales for the first half of the year rose about 11 percent compared to last year and were about 200,000 units higher than US sales. Check out GM’s press release below.

Continue reading GM China shows off electrification efforts with wide range of e-powertrains

GM China shows off electrification efforts with wide range of e-powertrains originally appeared on Autoblog Green on Mon, 30 Sep 2013 15:28:00 EST. Please see our terms for use of feeds.

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