By Michael Trinkle, ForexTraders

Two of the most powerful people in the world will speak Thursday morning concerning the global economic outlook.  The EUR/USD has moved up slightly during the London session on the heels of positive bond auctions in Spain and France; however, the market was unable to bid prices up beyond yesterday’s HI’s at 1.2855 as investors wait for European Central Bank President Jean-Claude Trichet to speak at 8:30 am and Fed Chairman Ben Bernanke at 9:00 am.

Although today is heavy with key risk events, the market may not break out of its trading range until the Non-Farm Payroll release tomorrow morning.  NFP tends to be one of the most revered key leading indicators of economic health, and the market may be hesitant to commit to large directional positions before the NFP confirms economic direction.

Trichet

As stated, the euro found strong support this morning as a result of strong bond auctions in France and Spain.  Strong bond auctions are expected in France, but the market is still watching Spain, Portugal, Greece, Italy, and Ireland very closely.  For several months now, we have been writing about the possibility of the EuroZone Debt Crisis re-emerging this fall.  One of the leading indicators that will show the EuroZone is again in serious trouble will be when and if these struggling countries face difficult bond auctions.  As of yet, there is still plenty of investor demand for these bonds, but if the fiscal concerns do become serious enough that investors are unwilling to buy Greece, Portugal, Spain, Ireland, or Italy’s bonds, then there will most likely be a huge bout of risk aversion that sweeps the market once again.

European equity markets remained subdued even in light of the positive bond auctions as investors were unwilling to bid prices up before Trichet speaks this morning.  The market will be watching and listening closely to see whether Trichet formally commits to extending liquidity to help the European banking system.  GDP blew past market expectations in the 2nd quarter.  The expected figure was 0.7%, and the actual figure came out at 1.0%, which was quite surprising considering the systemic problems the EuroZone faced during the Q2 with its Debt Crisis.  However, Germany was able to benefit enormously from a cheap euro as its exports were much more attractive to foreign buyers, and that increased exporting activity in Germany helped overall EuroZone GDP tremendously.  Now, many economists are concerned that economic growth will slow significantly in Q3 as the euro has strengthened during the last 3 months.

Trichet is also expected to cast a cautious tone concerning economic outlook, but traders will be listening closely for any new verbiage or departure from his normal mood of cautious optimism.  Trichet has also been championing fiscal austerity in developed nations, saying that countries such as the U.S. should turn to decreasing government spending.  Interestingly enough, Fed Chairman Ben Bernanke is actually about to the do the exact opposite as he and the rest of his Board Members at the Fed are currently preparing to inject another round of fiscal stimulus into the U.S. economy.

Bernanke

Today, Fed Chairman Ben Bernanke will be testifying before the Financial Crisis Enquiry Commission in Washington DC.  Bernanke’s testimony comes in 2 parts:  a written, prepared statement and an open Q&A session with the Congressional board.  The prepared statement does not generally move the market as most of his verbiage will most likely be as expected, but during the Q&A, his answers to tough questions oftentimes offer a clearer picture to investors concerning the Federal Reserve’s next steps.

The most likely scenario in the United States is that the economy will enter into a prolonged period of very sluggish growth.  Mr. Bernanke has been communicating this view consistently, but he is concerned that the very sluggish growth could pull the U.S. into a deflationary period, which can be disastrous for an economy and can lead to a decade or more of virtually no economic growth.  This fear is why Mr. Bernanke and the Federal Reserve are seriously considering yet another round of quantitative easing.  They are willing to do anything to stimulate the economy back into robust growth.

Market Price Action

Yesterday, we mentioned the euro was beginning to put pressure on resistance to the upside.  We currently have some very fascinating price action beginning to develop between the euro, pound, and dollar.  Generally, the EUR/USD and GBP/USD move in very tight correlation.  However, we have been seeing that correlation break down over the last few days.  This morning, U.K. Nationwide HPI came out below the market expectation of -0.3% at -0.9%.  This surprise to the downside led the pound to move lower in the immediate aftermath of the release and then to drift sideways and lower throughout the London session.
 
On the other hand, the euro has again moved to the upside during the London session today.  The economic outlook and Central Bank leaders in the U.S, U.K. and EuroZone are diverging.  In the EuroZone, Trichet is by far the most hawkish concerning interest rates and monetary conditions, and the EuroZone is also posting pretty good economic data relative to these other countries.  Therefore, the euro is beginning to move higher, and if economic data continues to back up Trichet’s decisions, we could see the euro move up quite a bit versus both the dollar and pound in the coming weeks.

Of course, the elephant in the room concerning the EuroZone is the possibility that any day the EuroZone Debt Crisis could begin to erupt again, but currently those fears seem to be on the backburner.  If the sovereign default concerns in the EuroZone can remain contained, then the euro could move up quite nicely in the next few months.

We have been calling for a huge drop in the euro at some point in the latter part of 2010, but the reality is that will most likely not happen as long as the Debt Crisis remains under control.  As a trader, be on the lookout for the first signs of major fiscal trouble in struggling EuroZone countries.

More articles from ForexTraders….

The Daily Reckoning

Since I am known as something of a gold bug, a lot of people write to me about gold, but since I am a paranoid lunatic, I don’t read their letters, mostly because I now call myself Marvelous Macho Grande (MMG), figuring that an established alias could potentially come in handy when the prices of gold, silver and oil shoot higher and higher as inflation in consumer prices starts going parabolic as a result of the despicable Federal Reserve creating so, so, so much money, especially so that the despicable federal government can borrow and spend that selfsame so, so, so much money.

So, you can see how a dramatic, romantic new name like Marvelous Macho Grande (MMG) would perfectly suit a guy like me, which is a guy with a theoretical massive coming increase in wealth from investing according to The Mogambo Perfect Portfolio (TMPP), which uses the Austrian school of economics (see Mises.org) and the last few thousands of years of history as Absolutely Compelling Reasons (ACR) to invest in gold, silver and oil when the government is acting so insanely bizarre, as does ours now, blithely deficit-spending a monstrous 11% of GDP, now with a national debt nearing a heart-stopping 100% of GDP, and allowing the Federal Reserve to continue to create So Freaking Much (SFM) money that, like creating too much money always does, it creates booms and bubbles that predictably, inevitably, unstoppably, disastrously go bust, leaving you, sadly, worse off than before.

So, you can see how I am not in the mood to answer emails from people who, deep down in their hearts, are pleading, “Oh, please help me, Masterful Mogambo Guru, or Marvelous Macho Grande (MMG), or whatever in the hell your name is this week: Sadly, I have not been following your terrific advice to buy gold, silver and oil as the One True Way (OTW) to end up with a lot of money without working for it, and now I need one of your famous Secret Investment Plans (SIP) to make up for lost time, else I am reduced to being the widow of a rich Nigerian banker who needs to sneak $100 million out of Nigeria and into your country. In that case, I will give you $50 million after you give me your bank account number and $5,000 in cash to pay various fees, expenses and bribes.”

Alas, I don’t have $5,000 to invest in this terrific opportunity to make a quick $50 million, as likewise there are no Secret Investment Plans (SIP), although I have spent a lifetime looking for one.

Fortunately, constantly buying gold, silver and oil is always the smart thing to do when your stupid, desperate, half-witted, corrupt, clutching-at-straws government is acting like all the other stupid, desperate, half-witted, corrupt, clutching-at-straws governments that created too much money and destroyed themselves over the last 4,500 years.

And if you don’t believe me, then maybe you will listen to the famous Richard Russell of the Dow Theory Letters, who writes, “Investors sometimes get caught up in the day to day and week to week movements in gold and silver. Don’t waste your time or energy on that, just accumulate. Standing in front of us is the greatest transfer of wealth in history. When the dust settles, those holding the gold will make the rules.”

And “just accumulate” sounds so easy because it is so easy, which is why I say, as I always say until you are tired of hearing me say it, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning Australia

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The Daily Reckoning

Well, August washed up. It was the worst month for US stocks in almost a decade. And yesterday didn’t help. The Dow couldn’t manage a rally. It rose just 4 points.

The British newspaper, The Telegraph, has the story:

Those fears took centre stage again during the final day of trading.

In New York, markets enjoyed some brief respite from the blizzard of weak data as reports on the US housing market and consumer confidence proved better than feared. The Conference Board’s index of consumer confidence climbed to 53.5 last month from 51 in July, while the latest reading from the respected S&P/Case-Shiller index showed that home prices were up 4.2pc in June compared with a year ago.

The day’s rally proved short-lived, however, after the minutes of the Federal Reserve’s latest meeting returned investors to the summer’s familiar themes. Fed chairman Ben Bernanke has spent the past few weeks facing increasing pressure from markets to publicly declare he will do more to fight the prospect of a second recession if the recovery stumbles further. According to the minutes, some members of the Fed’s Open Market Committee saw “increased downside risks to the outlook for both growth and inflation”.

That admission left the Dow up just 4.99 points at 10,014.72 for the day, while the S&P ended the day up 0.41 at 1,049.33.

As predicted on this page, both Martin Wolf and Paul Krugman are taking the low road. Not that we wouldn’t take it too, were we in their position. They urged the Obama team to undertake massive programs of “stimulus.” Now that the stimulus hasn’t worked, they say it wasn’t massive enough.

And thank God the administration at least took some of our advice, they add. Otherwise, things would be a lot worse!

In today’s Financial Times, Wolf refers to a recent paper by Alan Blinder and Mark Zandi. The two use a “standard macro-economic model” to determine that without the feds’ intervention the decline in GDP would have been three times worse and unemployment would have risen to over 16%. And, can you believe it, we would have had a federal deficit of $2.6 trillion.

Oh man, oh man…we’re so grateful to Wolf, Krugman, Summers, Obama, Bernanke and all the other savants who protected us from such a dreadful fate.

But wait a minute, this “standard macro-economic model” sounds great and all…but we can’t help but wonder. It can predict precise outcomes based on federal policy inputs, right? That is, if the feds were to do such and such…it tells us what will happen, right? And Wolf says it’s “standard,” so we imagine that you can get it at any Wal-Mart or filling station. So, the Obama team must have had it two years ago, right? We can’t help wonder if this was the same model they used when they forecast that unemployment wouldn’t go over 8% – if Congress agreed to the stimulus bill the administration proposed. Must have been a different one… Because Congress did pass the stimulus bill and unemployment rose over 9% anyway.

And it’s still over 9% – almost 2 years after the stimulus effort got underway.

So, maybe this “standard macro-economic model” is full of… But let’s imagine that it isn’t. Let’s allow our imaginations to take flight…to soar…to loose themselves from the gravity of worldly cares or practical reality. Let’s imagine that these economists have a clue!

Imagine that the feds had done nothing – which was more or less standard policy for the nation from its founding in 1776 up until the middle of Herbert Hoover’s term in 1930…and for all the years that preceded them…all the way back to the founding of Rome. Now, let’s imagine that Blinder and Zandi are right. Without fed intervention, GDP would have sunk 12% – three times more than the actual loss…and half the loss of the Great Depression. Well, that would have been a disaster, right?

Well. Maybe not. It might have been a blessing. The point of a correction is to correct. The Blinder/Zandi study tells us that the economy had mistakes equal to 12% of GDP. Okay…well, maybe the correction overshoots. Who knows? But think of the crazy years of the Bubble Epoque…when lenders were giving unemployed people a mortgage for 110% of the inflated value of a house. Think about the Private Equity deals based on growth assumptions that were hallucinatory. Think about the hundreds of trillions’ worth of derivatives based on complex formulae that were phony and silly? Think of all the decisions made on the assumption that consumer credit would continue to expand as it had from 1949 to 2007. Was one of every 8 of them too optimistic? Too ambitious? Too unrealistic? We’d be surprised if there weren’t more errors…far more than 12% of GDP.

Now ask yourself…what good was done by failing to correct those mistakes? By failing to wash out the excess debt? Failing to allow insolvent banks to go broke? Failing to permit worn-out, uncompetitive businesses to die in peace?

We don’t know how many mistakes there were. We don’t know how far GDP SHOULD go down. And we don’t know what would have happened if willing buyers and sellers had been allowed to sort themselves out in the age- old ways – by panic, default, bankruptcy, restructuring, and reconstruction.

We don’t know. We’ll never know. But there is no reason to think we’d be any worse off if we’d found out a year ago. A 12% drop in GDP might have been just what we needed. We could be on the road to prosperity now, rather than looking at another 5 to 15 years of stagnation, decline, and desperation.

And more thoughts…

But we have good news. Yes, dear reader, genuine, no-doubt-about-it good news.

Two bits of good news, actually.

First, the café across the street from our office serves a proper café au lait. A real one.

In Paris these days, if you ask for a “café au lait” they mark you as a foreigner. Parisians ask for a “café crème.” Trouble is, the café crème doesn’t have much milk in it. It tends to be a bit watery and bitter.

A proper café au lait, on the other hand, is served with a little pitcher of hot milk. Not many cafes in Paris still serve it that way – unless you ask them specifically. Fortunately, the one across the street still does it the right way.

Second, and perhaps more important, we discovered yesterday that tea- totallers die sooner than heavy drinkers. This comes as a great relief to your editor. He sat down last night with a bottle of Lussac St. Emilion to celebrate.

Here’s the story from John Cloud (originally appearing in Time Magazine):

Why Do Heavy Drinkers Outlive Nondrinkers?

One of the most contentious issues in the vast literature about alcohol consumption has been the consistent finding that those who don’t drink actually tend to die sooner than those who do. The standard Alcoholics Anonymous explanation for this finding is that many of those who show up as abstainers in such research are actually former hard-core drunks who had already incurred health problems associated with drinking.

But a new paper in the journal Alcoholism: Clinical and Experimental Research suggests that – for reasons that aren’t entirely clear – abstaining from alcohol does actually tend to increase one’s risk of dying even when you exclude former drinkers. The most shocking part? Abstainers’ mortality rates are higher than those of heavy drinkers.

Moderate drinking, which is defined as one to three drinks per day, is associated with the lowest mortality rates in alcohol studies. Moderate alcohol use (especially when the beverage of choice is red wine) is thought to improve heart health, circulation and sociability, which can be important because people who are isolated don’t have as many family members and friends who can notice and help treat health problems.

But why would abstaining from alcohol lead to a shorter life? It’s true that those who abstain from alcohol tend to be from lower socioeconomic classes, since drinking can be expensive. And people of lower socioeconomic status have more life stressors – job and child-care worries that might not only keep them from the bottle but also cause stress-related illnesses over long periods. (They also don’t get the stress-reducing benefits of a drink or two after work.)

But even after controlling for nearly all imaginable variables – socioeconomic status, level of physical activity, number of close friends, quality of social support and so on – the researchers (a six- member team led by psychologist Charles Holahan of the University of Texas at Austin) found that over a 20-year period, mortality rates were highest for those who had never been drinkers, second-highest for heavy drinkers and lowest for moderate drinkers.

The sample of those who were studied included individuals between ages 55 and 65 who had had any kind of outpatient care in the previous three years. The 1,824 participants were followed for 20 years. One drawback of the sample: a disproportionate number, 63%, were men. Just over 69% of the never-drinkers died during the 20 years, 60% of the heavy drinkers died and only 41% of moderate drinkers died.

These are remarkable statistics. Even though heavy drinking is associated with higher risk for cirrhosis and several types of cancer (particularly cancers in the mouth and esophagus), heavy drinkers are less likely to die than people who have never drunk. One important reason is that alcohol lubricates so many social interactions, and social interactions are vital for maintaining mental and physical health. As I pointed out last year, nondrinkers show greater signs of depression than those who allow themselves to join the party.

The authors of the new paper are careful to note that even if drinking is associated with longer life, it can be dangerous: it can impair your memory severely and it can lead to nonlethal falls and other mishaps (like, say, cheating on your spouse in a drunken haze) that can screw up your life. There’s also the dependency issue: if you become addicted to alcohol, you may spend a long time trying to get off the bottle.

That said, the new study provides the strongest evidence yet that moderate drinking is not only fun but good for you. So make mine a double.

Bill Bonner
for The Daily Reckoning Australia

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Zero Hedge

Seeing Past The Hologram, by Mike Krieger of KAM LP

There is no distinctly American criminal class – except Congress.

- All quotes by Mark Twain

We Need Real Confidence to Return, Not Confidence in a Ponzi Scheme

Last week I pointed out that what I got from Banana Ben’s speech in Jackson Hole was that he realized any major public statement of interference in markets was too risky at this point following his announcement at the last meeting to keep the balance sheet steady by reinvesting MBS proceeds into treasury securities.  The operative word in this sentence being “public.”  Anyone that believes this means the Fed and government will just take a back seat and do nothing behind the scenes is deluding themselves.  Washington D.C. and the Fed still fail to comprehend how to increase standards of living in the real world, rather they remain completely addicted to the short-term buzz of printed money heroin as it flows through the house of cards they have created.  They also think that the only thing that really matters in an economy is “confidence.”  As Madoff can attest to, that is indeed the case when you are running a ponzi scheme and since the U.S. government is basically that I can understand where they are coming from.

 I agree that confidence is a huge part of any healthy economy; however, I do not define confidence in the way these arrogant bureaucrats do.  They think confidence comes from rising asset prices, including stocks and homes.  They think this is enough to spark growth in the real economy.  This is nonsense.  The confidence that is needed more than anything else today is two-fold.  First, confidence that there is the rule of law and there will be the rule of law in the future.  The second is that the money issued by the government will maintain its purchasing power over time.  As I have made clear on various occasions, I do not have confidence in either of these things based on how the government has responded to the crisis.  I do not like buying physical gold.  I do not like feeling the need to write these emails every week to warn people.  I wish I could employ capital into businesses and the real economy.  I hope that one day I will be able to do so, but at the moment I do not trust my government and I certainly don’t trust the fascist Federal Reserve.  So I will hoard what I have as the government prints and let the storm pass me by.  I am not the only one.  People are collectively starting to understand this.  So what happens when the big, smart money takes itself out of the investment and capital allocation game because they don’t trust anything?  What happens when the government’s response to this is to print money to keep up the spending habits of people with no jobs or people with government jobs that produce no goods for the economy?  You get the worst case scenario and that is exactly what is staring us straight in the face.

Is a Trade War with China Coming?

The quicker the dollar is devalued the better.  This is not to say that I think dollar devaluation is a good thing.  It is to say we are past the point of avoiding it.  We could have taken the pain in 2008, but instead it was extend and pretend all over again.  Now the debt and promises are too big.  The behind the scenes manipulations are too entrenched.  There is no avoiding a devaluation relative to things people need (food and energy) and capital goods that are imported.  The best thing would be to get it over with and then change policies and restore the rule of law.  The problem with this is that the main currencies the dollar needs its major adjustment against are those in emerging Asia and China.  What has prevented the realignment from happening in a quick and healthy way is China’s refusal to allow the yuan to appreciate.  This creates a situation where Central Banks throughout emerging Asia take steps to prevent their “free-floating” currencies from adjusting either.  If China does not change its policy I fear that what we are looking at a trade war with China after the November elections.  I think Congress and the Administration will start to introduce aggressive policies to discourage Chinese goods and encourage goods made at home.  Think it can’t happen?  We are a lot closer than you think.  This all goes back to my “think local” theme.  While I am inherently a fan of free trade we do not have free trade in any sense whatsoever.  We have policies that are geared to advantage the multi-national corporations at the expense of the U.S. citizen.  The U.S. consumer has merely been spending borrowed money.  This gave an illusion that the U.S. was benefiting from the global multinational corporate rigged market whose model mainly thrives on companies moving abroad to exploit the labor arbitrage caused by a combination of what was a labor surplus (no longer it seems) and a rigged currency.  As more people realize this, more pressure will be placed on politicians and ultimately this will overpower the corporate lobbyists and a trade war of sorts will begin.  Then the chaos could really ensue as we engage in a trade war with our biggest creditor!

Seeing Past the Hologram

The past couple of weeks have been extraordinarily interesting and some of the moves appear to be extremely important.  Although a lot of people like to point to the treasury market and then extrapolate out as to what this means to equities and the ability of the government to increase spending, I think this is the most USELESS market in the world to watch.  If anything is a hologram and a PR tool it is the U.S. treasury market.  How can people with a straight face come out and extrapolate anything from a market where the Federal Reserve is buying the debt of its own government!  The Fed is merely the fiat drug dealer to a government addicted to spending and false promises.  The equity market is the second most useless market in my opinion.  There is no doubt in my mind that a huge part of the government’s “strategy” to build confidence is to keep this thing from doing what it should be doing.  Thus, I am not surprised at all that since I last wrote the S&P500 was +1.6%, -1.5%, flat, and then +3.0%.  So what you have seen is high volatility with no real direction.  How can anyone have confidence this that thing is for real?

So what markets do I watch?  I get the most from the FX markets and the commodity markets.  While these markets are no doubt manipulated heavily as well, I think this is where the players that really understand the macro are playing.  The first currency I check in the morning is the dollar/yen.  The reason for this is that the yen is back to the highs of 1995 and if it does not stop appreciating around this level I think the Bank of Japan is going to absolutely panic.  While the yen has not broken higher yet as market participants are afraid of such intervention, unless the BOJ does something extreme soon the market may test their resolve and push this thing further.  I guess the main point I am trying to make is that with the Chinese yuan NOT strengthening and the yen threatening to break out we could be in for some major fireworks.  Meanwhile Japanese 10 year government bond yields have really started to spike lately (chart GJG10 Index on Bloomberg).  Something big is happening in the land of the rising sun.  In the back of my head I think that any panic move from the BOJ could be the spark that breaks government bond bubbles globally and ushers in a period of massive global commodity driven inflation as every country tries to devalue their way to prosperity.  Essentially, a fiat money version of the 1930’s beggar thy neighbor policies.  When this begins the rush into gold and silver that we have seen thus far will look like a trickle.  I don’t think people will be able to find supply anywhere near the quoted price on comex (or as some like to call it “crimex”).

This brings me to silver which potentially experienced a game changer last week.  I can’t remember the last time silver bounced back almost immediately after every attempted raid.  I am starting to wonder how much physical silver is available.  What we do know is that Central Banks do not store silver to manipulate markets.  Even if it doesn’t break out right now, there is no asset in the world that has more upside than silver.  Don’t buy SLV either.  Buy physical silver not something with JPM as a custodian. 

I also continue to watch food prices very closely.  Wheat, which has come off of its high now seems to have found a base at a price that is 50% higher than the end of June.  Corn prices are threatening to break above resistance at levels 30% where they were at the end of June.  Rice looks like it could have a long way to go on the upside as it is only 20% off of its June low.  If I were a foreign government I would be using this opportunity to buy every single grain of rice I could in order to feed my people when things get dicey in the months ahead.  After strong performance in recent months lean hogs and live cattle also look set to make another push to the upside.  How people in the investment world still focus on the government inflation statistics is beyond me.  It was the rampant commodity inflation, trucker strikes and food riots that played a key role in ending the game in 2008.  This is because it forced the emerging markets to raise rates and cool growth as the Western world imploded under a pile of debt.  It seems the whole play is starting again and people remain focused on deflation.  Deflation in some things yes I agree (discretionary things like homes, technology, stock prices, etc), but not in the things you NEED to buy!!!

Onto oil which is also exhibiting some strange moves.  The Asian benchmark Tapis has not experienced the recent volatility and weakness that WTI has and is currently trading at $80/b.  The Asian price is the one I really pay attention to since that is where the demand growth resides.  The spread between the two now is back above $6/b, which is toward the high end of the range for the past two years.  This tells me that one price is wrong and the spread should narrow.  Given what I think about currency debasement and lack of appropriate investment in the space I think WTI should rally.  We shall see…

A Primer on the Federal Reserve

For those that read my commentary on the Federal Reserve as an immoral an fascist institution and think to themselves “what is this guy talking about,” I have attached a video from G Edward Griffith (the author of The Creature from Jekyll Island).  It’s a great description of how the Fed was formed and who it answers to when push comes to shove.  http://video.google.com/videoplay?docid=6507136891691870450#

Also in case you weren’t aware of the power grab that the “Financial Reform” legislation allowed the Fed, read this Bloomberg article. 

http://www.bloomberg.com/news/print/2010-09-02/bernanke-meets-buffett-in-new-role-conceived-to-protect-markets.html

All the best,
Mike

More articles from Zero Hedge….

Zero Hedge

You will pardon us for posting two excerpts from David Rosenberg today, but this one is a must read, and explains more clearly than anything written on the matter why America is currently, and without doubt, in a depression, due primarily to ongoing secular changes in consumer and investor behaviour, something not experienced during mere recessions. As such any intraday or short-term bounces in the stock market that merely confirm that there was a liquidity injection by one player or another, or a successful short squeeze engineered by the wily folks at the custodian firms or due to simple headfakes, are completely irrelevant (especially with record implied correlations), as the long-term trend has only one way to go in the long-run. Down. Of course, those who believe they can time the moment when the last lingering support pillar collapses and everything tumbles down, are more than welcome to keep trying their top-ticking. We are confident that when the mass exodus begins, the HFT liquidity “support” of the market will be alive and well, and provide everyone with a perfectly acceptable exit price level…

WHAT IS A DEPRESSION ANYWAY?

A depression, put simply, is a very long period of economic malaise. A series of rolling recessions and modest recoveries over a multi-year period of general economic stagnation as the excesses from the prior asset and credit bubble are completely wrung out of the system. In baseball parlance, we are in the third inning of this current debt deleveraging ball game.                                     

You know you’re in a depression when interest rates go to zero and there is no revival in credit-sensitive spending. 

The economy is in a depression when the banks are sitting on $1.3 trillion of cash and yet there is no lending going on to the private sector. It’s otherwise known as a liquidity trap.    

Depressions usually are caused by a bursting of an asset bubble and a contraction in credit, whereas plain-vanilla recessions are typically caused by inflation and excessive manufacturing inventories. You tell me which fits the bill today.

When almost half of the ranks of the unemployed have been looking for a job fruitlessly for at least six months, you know you are in something much deeper than a garden-variety recession. True, we can’t see the soup lines; the soup lines are in the mail — 99 weeks of unemployment cheques for over 10 million jobless Americans. Don’t be lulled into the view that we are into anything remotely close to a normal economic cycle.

Basically, in a depression, secular changes take place. Attitudes towards debt, discretionary spending and homeownership are altered for many years, or at least until the scars from the traumatic experience with defaults and delinquencies fade away. That is why, as per last week’s data releases, we saw existing home sales slide to 15-year lows and new home sales to record lows despite the fact that mortgage rates have tumbled to their lowest levels in modern history. There is no economic model that would tell you that declining  mortgage rates should lead to lower home sales.

In a depression, radical changes occur in terms of social norms and spending behaviour. In recessions, people don’t cancel their life insurance policies – as one example. But in a depression, tragically, that is what happens – almost 35 million Americans now have no such coverage, up from 24 million five years ago. This reflects the focus by households to pay down their debts at all costs and how companies have bolstered profits – by eliminating benefits.

More fundamentally, in a recession, the economy is revived by government stimulus. In depressions, the economy is sustained by government stimulus. There is a very big difference between those two states.    

After all, we are now in a situation where every 1-in-6 Americans is now receiving some form of government assistance — more than 50 million Americans, from food stamps, to Medicaid, to extended jobless benefits, are on one or more taxpayer-supported programs. That transcends the definition of a recession.

In a recession, everything would be back to a new high 33 months after the initial decline. This time around, everything from organic personal income to employment to real GDP to home prices to corporate earnings to outstanding bank credit are still all below, to varying degrees, the levels prevailing in December 2007.

Let’s be clear: After all the monetary, fiscal and bailout stimulus, the economy should be roaring ahead, as would be the case if the economy were coming out of a normal garden-variety recession. The fact that there has been no sustained response to all these efforts by the government to turn things around is a testament to the view that this is not actually a traditional recession at all, but something closely resembling a depression. That, my friends, is exactly what the bond market is signaling, with Treasury yields rapidly approaching Japanese levels.  

For all the chatter about whether the recession that started in December 2007 ended sometime last year, here is what you should know about the historical record. The 1930s depression was not marked by declining quarterly GDP data every single quarter. In fact, the technical recessionary aspect to the initial period following the asset and credit shock goes from the third quarter of 1929 to the first quarter of 1933.

What is important to know is this; in that initial four-year economic downturn, from 1929 to 1933, there were no fewer than six — six! – quarterly bounces in GDP data. The average gain in these up-quarters was 8% at an annual rate! But because they proved not to be sustainable, the National Bureau of Economic Research (NBER) refused to declare that the recession officially ended, even though the stock market rallied 50% in the opening months of 1930 on the belief that the downturn was about to end. False premise. And guess what? We may well be reliving history here. If you’re keeping score, we have recorded four quarterly advances in real GDP, and the average is only 3%.

I can understand how emotional the debate can get over whether or not we have actually just stumbled along some post-recession recovery path or whether or not this is actually a depression in the sense of a downward trend in economic activity merely punctuated with noise that is influenced by recurring rounds of government intervention. The reality is that the Fed cut the funds rate to zero, as was the case in Japan, to little avail. Then the Fed tripled the size of its balance sheet – again with little sustained impetus to a broken financial system. Government deficits of nearly 10% relative to GDP, or double what FDR ever ran during the 1930s, have obviously fallen flat in terms of providing and lasting impact to the economy.  

This is going to sound like a broken record but it took a decade of parabolic credit growth to get the U.S. economy into this deleveraging mess and there is clearly no painless “quick fix” towards bringing household debt into historical realignment with the level of assets and income to support the prevailing level of liabilities. We are talking about $6 trillion of excess debt that has to be extinguished either by paying it down or by walking away from it (or having it socialized). Look, we can  understand the need to be optimistic, but it is essential that we recognize the type of market and economic backdrop we are in.

The markets are telling us something valuable when (after a period of unprecedented government bailouts, incursions and stimulus programs) we had a 2-year note auction that saw the yield dragged to new record low of 0.46%. Instead of lamenting over how attractively priced equities must be in this environment, market strategists and commentators would bring a lot more to the table if they tried to decipher what the macro message is from this price action in the Treasury market. Conducting stock market valuation analysis based on unrealistic consensus earnings assumptions does nobody any good, especially when these estimates are in the process of being  cut.

If the Treasury market is correct in its implicit assumption of a renewed contraction in the economy, then we could well be talking about corporate earnings being closer to $60 or $65 in the coming year as opposed to the current consensus view of almost $90. In other words, we may wake up to find out a year from now that whoever was buying the market today under an illusion of a forward multiple of 12x was actually buying the market with a 17x multiple.

How’s that for a reality check?

More articles from Zero Hedge….

By Karl Denninger, The Market Ticker

Again, I must say……

The same principal has left the nations public and private pension funds badly underfunded.

We are actually more underfunded than we were at the end of 2008 because of the drop in interest rates since then, said John Ehrhardt, who tracks fund performance for benefits consultant Milliman.

That "same principal" is The Fed’s ZIRP policy.

By picking winners – in this case the banks who made imprudent loans and should have been forced out of business, along with "protecting" the imprudent buyers of bonds in institutions that made those imprudent loans, the prudent are getting hammered.

There is no solution to this other than to stop doing that.  And this means withdrawing liquidity and forcing the borrowing of money to have a reasonable cost, so that those who lend money through the purchase of bonds can earn a reasonable inflation-adjusted return.

The initial "impact" of low interest rates appears seductively good.  It’s not – it’s always bad.  It forces people to take imprudent risks (how do you think we got a housing bubble in the first place?) and destroys the prudent investor, lender of capital and saver.

As these people are eviscerated their ability to contribute positively to the economy is likewise destroyed, and in particular, capital formation is critically damaged.

This is the real story on how Japan lost two decades. 

We will follow them unless we stop this insanity, and soon.

(PS: Are the unions still sheep on this issue, more than two years after I started sounding this alarm?)

More articles from the Market Ticker….

By Karl Denninger, The Market Ticker

I have a very disturbing email that came in this evening.

It alleges out-and-out fraudulent reporting of home sales in one of the regional MLS systems.

That is, prices paid that are in fact much lower than the "sold" prices reported in the MLS.

The person in question claims to have seen over 100 of these in his area.  I have copies of two, and it appears, from the evidence that I have, that at least for those two the claim is accurate.

One in particular I was able to pull the auction data on.  It "sold" under reserve, is listed as sold in the MLS at ~25% higher than the "sold" bid, and the premium is disclosed as 5%.  This property also has a 90-day "anti-flip" provision on it, implying that the paper may be held by one of the GSEs.  (It’s a nice-looking place, incidentally.)

Here’s the problem, obviously – Case-Schiller and other "home statistics" numbers related to price paid are all computed off these numbers provided by the local Realty boards (via NAR.)  If the data in the MLS is bogus then so is the so-called "median sales price" and so are Case-Schiller’s numbers!

These are not small discrepancies either – in both cases the "over-reporting" is by approximately 25%! 

Both subject properties sent to me were auctions.

I am going to dig into this – if this can be verified and is happening nationally the claims of recent price stabilization are utter crap, and the first obvious question that arises is "how far back does this go?"

It also raises a key question when it comes to BPOs, not only from a standpoint of bank valuations (e.g. "drive-bys") but additionally if you’re buying a house and your agent is showing you comparable sales predicated on faulty MLS data you are going to be induced to RADICALLY overpay.

For the time being I would verify any claimed "sold" prices with the county recorder before believing any alleged "sold" prices you’re being fed as comparables.

This might be an anomaly, an "isolated incident", or it may not be what it appears to be, but with a 25% disparity we’re not talking small potatoes if this is accurate.

I’ll post follow-up Tickers on this as I learn more…..

More articles from the Market Ticker….

Oil Price Ignores Long-Term Supply Worries

You could be excused for seeing a grim metaphor for the death of the oil age in the scenes of destruction visited on the U.S. Gulf coast this summer.

However, production from the ocean floor is growing more quickly than from any other type of reserve and is supposed to allay concerns about ‘peak oil’, the idea that the amount of crude the world can produce might suddenly decline.

Now, so far, this notion hasn’t had much of an impact on energy prices.

But, as cheaper oil fields are run down and more crude is drawn from expensive, hard-to-reach offshore reserves, the costs of energy supply are starting to rise.

Drilling agency imposes conflict-of-interest rules

WASHINGTON – Scandalized by federal regulators who had sex with oil company executives and negotiated with them for jobs, the agency that oversees offshore drilling is imposing a first-ever ethics policy that bars inspectors from dealing with a company that employs a family member or personal friend.

Michael Bromwich, head of the Bureau of Ocean Energy Management, said the new policy should help restore credibility to his beleaguered agency, which was widely criticized under its former name — the Minerals Management Service — for being too close with oil and gas companies.

President Barack Obama and Interior Secretary Ken Salazar have pledged to end the agency’s “cozy relationship” with industry and slow the revolving door between government and the energy industry.

Pemex looks to shale

Pemex is considering opening an entire line of exploration that concentrates on shale gas wells in the northern state of Coahuila.

Pemex board member Hector Moreira told Market News International the new line could reduce the company’s dependence on natural gas imports.

OPEC oil output falls to lowest since Nov 2009

LONDON (Reuters) – OPEC crude oil supply fell in August to the lowest since November 2009 as reduced supplies from Nigeria, the United Arab Emirates and Iraq offset increased output in Angola, a Reuters survey showed on Wednesday.

Supply from the 11 members of the Organization of the Petroleum Exporting Countries with output targets, all except Iraq, averaged 26.83 million barrels per day (bpd) last month, down from 26.95 million bpd in July, according to the survey of oil companies, OPEC officials and analysts.

The Gas Bulls of Summer Turn into Bears

Recently, the last of the raging bulls on natural gas prices traded in their horns for bear uniforms – and we don’t mean the Monsters of the Midway variety! By throwing in the towel on gas prices for this year, these bulls-turned-bears then proceeded to claw their future gas price forecast by stating they expected $6 per thousand cubic feet (Mcf) to be the long-term average. The reality is that these bulls of summer were really merely acknowledging the power of the market as natural gas prices are about two dollars per Mcf below where they were at the start of 2010, and well below the $7.50/Mcf average gas price the bulls had forecast.

Feds downplay risk of leak when well cap moved

The federal government’s point man on the Gulf of Mexico spill response said Wednesday there is no “significant risk” that more oil will leak into the sea when engineers remove the temporary cap Thursday that first contained the gusher in mid-July.

Retired Coast Guard Adm. Thad Allen said vessels will remain on standby just in case to collect any leaking oil.

FACTBOX – Key political risks to watch in Uganda

(Reuters) – Uganda expects to become an oil-producing nation in 2011, but a protracted dispute with British exploration firm Heritage Oil may delay production and risks unsettling other investors.

With the potential to be a top 50 oil producer, Uganda stands to reduce its budget dependence on foreign aid and improve poor infrastructure.

Nissan starts selling all-electric Leaf sedan today

At long last, Nissan begins taking actual orders today for the first next-generation fully electric car from a major automaker, the Leaf.

Carpooling

Passengers might be the most under-appreciated factor in how much fuel and money you waste. As I write this, for example, a business headline boasts of Toyota’s multi-million-dollar plan to boost fuel efficiency by 25 percent, with the usual discussion of what this will mean for the economy and the climate. Any of us, however, can boost the efficiency of our cars by several hundred percent instantly, with no additional expense or technology, simply by getting more people in the car.

This fact is also forgotten when we judge car owners by the wastefulness of their vehicles. An SUV is a spectacularly inefficient machine compared to a Prius, for example, but pack that Dodge Durango full of people and suddenly it is greener than the electric hybrid driven alone.

Transit systems easier to predict with smart phone apps

Allen Stern says he had a 40-minute wait between buses when he lived in Manhattan. Using a free mobile app that became available about a year ago, he could at least tap into the Metropolitan Transit Authority with his cellphone and find out exactly how far away the next bus was from his stop.

Jatropha: A new form of energy

SINGAPORE – Biotechnology firm JOil is confident that it can breed and genetically engineer the Jatropha plant to be a more sustainable alternative to fossil fuel and other biofuels.

It plans to create a Jatropha hybrid that can produce more fruits and match the four to six tonnes of oil per hectare that palm trees can generate.

Pedal power takes off as exercise produces electricity

Pedal power is gaining traction as thousands of bikes and elliptical machines are retrofitted to produce electricity.

Gyms are using sweat equity to help power their facilities. A Brooklyn eatery uses it to make smoothies. Female inmates at a Phoenix jail pedal to power their TV to watch soap operas. Actor Ed Begley Jr. bikesrides a bike to run his toaster.

Obama lobbied to add solar panels to White House

A campaign to make the White House greener is intensifying as a group of environmentalists plan this month to give President Obama a solar panel that used to sit atop 1600 Pennsylvania Avenue.

Points of departure

There is a strong correlation between energy consumption and economic growth. We can for sure hope for “decoupling” – to be able to have continued economic growth while maintaining or even reducing energy use – but no country has ever managed this Indian rope trick and that does not bode well. Maybe we are high on energy, listening a little to closely to the voice of intoxication, but it will unfortunately all too soon be replaced by a massive hangover.

The Peak Oil Crisis: Prospects for China

The key question in all this is how much longer China’s economic miracle can continue before the realities of finite mineral resources force a slowdown? Another five years of 10 percent annual economic growth will result in Beijing increasing its oil consumption by another 2.5-3 million barrels per day. This alone would likely mop up much of the world’s spare capacity to produce oil and result in very large price increases. When China’s ever growing demand is added to that of India, Brazil and the oil exporting states, the likelihood that we will see a substantial increase in oil prices within the next five years becomes very high.

Secret German military study warns of dramatic oil crisis

Berlin : A confidential German army study warned of a looming oil crisis which could have dramatic political and economic consequences for the world, the Hamburg-based weekly news magazine Der Spiegel said Tuesday.

According to the report, a think-tank of the German army has for the first time ever analyzed the security policy dimensions of the peak oil problem.

Peak Oil from a Security Studies Perspective

The Strategic Institute of the German Bundeswehr has now published a document on the implications of peak oil for security (more precisely: the study was leaked). The study is very well written and recommended as an essential read not only for geostrategist but especially for those involved in global sustainability questions. In fact, at least in wording the authors care about such diverse issues as environmental impact of unconventional oils and the impact of global-marked-induced land-use change on indigenous populations. It is worthwhile to have a closer look on some of their results:

Remembering Matt Simmons

Matt Simmons, a long time friend of the Maine coast and its islands and a student of the winds and waters of Gulf of Maine, loved to tell the story of his first trip to Maine, courtesy of a labor strike while he worked construction one summer as a college student in his home state of Utah. When a labor dispute suddenly shut down the construction site, he and a buddy were only too happy to collect their strike checks and head out on a jaunt. They went north into the Canadian Rockies then turned right and headed toward the Inscrutable East, dipping back down into the United States via the border at Jackman, where they drove along the shores of Moosehead Lake before ending up in Boston. On a lark, Matt ducked into the Harvard Business School, which had not had a long history at that point of actively recruiting students from Mormon country in Utah, but the visit was enough to entice him to apply and enroll. Matt loved telling that story because it held the kinds of mutually opposed contradictions he loved to explore-a businessman who owed his right future to a labor strike. If genius is the ability to hold mutually opposing ideas in the mind at the same time without being paralyzed, Matt Simmons would certainly qualify.

Oil Drops, Caps Worst Month Since May, as Hurricane Earl Threatens Demand

Oil tumbled, capping its worst month since May, on forecasts Hurricane Earl will pelt the U.S. East Coast, curbing fuel demand during the Labor Day holiday weekend.

Crude dropped the most in 12 weeks amid speculation that stormy weather will keep beachgoers and travelers at home. Labor Day is the traditional end of the U.S. summer driving season, the peak gasoline demand period. U.S. gasoline demand slid to a 12-week low last week, MasterCard Inc. reported today.

“It’s the last thing we need,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “It’s a big gasoline consumption weekend. Given how poor the gasoline demand has been, it will be a final parting blow for the summer driving season if people won’t hit the beach in droves.”

Ethanol Surpasses Gasoline for First Time Since December

For the first time since December, ethanol prices are higher than gasoline as corn surges and refiners profit from tax breaks.

Gas Prices Explained

So what determines the price of gasoline? Speculators? Evil conspiring oil companies? Well, actually no. It’s demand and supply, of course. On the demand side the American automobile fleet gets better gas mileage than it did a few years ago and Americans, whacked by the recession and high unemployment rates, are driving a bit less than they used to. In addition, thanks to government subsidies, about 9 percent of what goes into our gas tanks is ethanol produced from corn, which also reduces the demand for refined crude. On the supply side, global oil supplies are ample and refiners in the U.S. evidently believed the Obama administration’s rosy “recovery summer” scenarios and stockpiled a lot of gasoline.

Sinopec Plans to Cut September Oil Processing by 4% at Refinery in Hainan

China Petroleum & Chemical Corp., Asia’s biggest refiner, will process 4 percent less crude oil at its Hainan plant in September compared with last month, an official at the refinery said.

FACTBOX-Key political risks to watch in Saudi Arabia

(Reuters) – Saudi Arabia, under the rule of an ageing King Abdullah, has the dilemma of making reforms that keep the austere clerical establishment that opposes change on side and violent Islamist militants at bay.

Any instability at the helm of Saudi Arabia, which controls more than a fifth of the world’s crude oil reserves and is a regional linchpin of U.S. policy in the Middle East, would be a concern for the rest of the Arab Gulf region.

FACTBOX-Key political risks to watch in Yemen

(Reuters) – Rising al Qaeda militancy, a surge in violence in a secessionist south and crushing poverty will be this year’s critical tests for Yemen, neighbour to top oil exporter Saudi Arabia.

Reid hopeful for GOP energy votes after elections

WASHINGTON (Reuters) – Senate Majority Leader Harry Reid said he hoped to pick up Republican votes for a pared-down energy bill after the midterm congressional elections.

“Maybe after the elections we can get some more Republicans to help us on these issues,” Reid, a Democrat, told reporters in a teleconference on Tuesday.

Sinopec Sees Solid Gas Growth Ahead

While oil production experienced sluggishness in the first half, natural gas production showed solid growth. China is ramping up gas production as it seeks to find alternatives to coal, which emits high carbon levels. It is set to raise the country’s energy needs from the current 3% to 10% by 2020.

Insurance likely to reduce BP’s liability for Gulf of Mexico oil spill

BP PLC has taken on some of the blame for the Deepwater Horizon rig that spilled millions of gallons of oil into the Gulf of Mexico earlier this year, but the company is still expected to have limited liability for mistakes made misreading pressure data that indicated a blowout was imminent.

BP Raises $363 Million in Malaysian Asset Sale to Help Pay for Gulf Spill

BP Plc, seeking cash to help pay for the worst U.S. oil spill, agreed to sell its Malaysian chemical assets to Petroliam Nasional Bhd. to focus on projects in China and India.

BP will sell its 15 percent stake in Ethylene Malaysia Sdn and 60 percent interest in Polyethylene Malaysia Sdn for $363 million, the London-based company said today in a statement. It will also be eligible for a possible $48 million dividend from the ethylene unit.

A Nuclear Giant Moves Into Wind

Exelon, a nuclear giant that recently backed away from building new nuclear plants, is moving into wind.

Canada company builds major waste-to-biofuel plant

VANCOUVER, British Columbia (Reuters) – A Canadian company started construction on Tuesday on what it says is the world’s first industrial-scale plant to turn municipal waste into biofuel.

Privately-owned Enerkem Inc said the C$80 million ($75 million) facility in Edmonton, Alberta, will produce enough biofuel to keep more than 400,000 cars a year running on a 5 percent ethanol fuel blend.

Thorium Cures the Free Market

Obama could kill fossil fuels overnight with a nuclear dash for thorium … If Barack Obama were to marshal America’s vast scientific and strategic resources behind a new Manhattan Project, he might reasonably hope to reinvent the global energy landscape and sketch an end to our dependence on fossil fuels within three to five years.

New Warnings About Costs of Nuclear Power

As anticipation grows about a possible renaissance for the nuclear power industry — and about its potential for curbing greenhouse gas emissions — some politicians are stepping up warnings about the high cost of such projects.

Last week, Traicho Traikov, the Bulgarian economy and energy minister, said the cost of building a second plant near the Danube River had reached 9 billion euros, or $11.4 billion, according to the Sofia News Agency.

The original cost of the project for two reactors was expected to be just under $4 billion.

Homeowners Must Pay Off Energy Improvement Loans

Many homeowners who participated in a program that let them repay the cost of solar panels and other energy improvements through an annual surcharge on their property taxes must pay off the loans before they can refinance their mortgages, two government-chartered mortgage companies said Tuesday.

The guidance came from Fannie Mae and Freddie Mac as efforts to resolve a dispute over the program — called Property Assessed Clean Energy, or PACE — have failed.

Calif. rejects ban on plastic shopping bags

SACRAMENTO, Calif. – California lawmakers have rejected a bill seeking to ban plastic shopping bags after a contentious debate over whether the state was going too far in trying to regulate personal choice.

The Democratic bill, which failed late Tuesday, would have been the first statewide ban, although a few California cities already prohibit their use.

A Greener Champagne Bottle

“This is how we’re remaking the future of Champagne,” he said, pointing to the area just below the neck. “We’re slimming the shoulders to make the bottle lighter, so our carbon footprint will be reduced to help keep Champagne here for future generations.”

The Champagne industry has embarked on a drive to cut the 200,000 metric tons of carbon dioxide it emits every year transporting billions of tiny bubbles around the world. Producing and shipping accounts for nearly a third of Champagne’s carbon emissions, with the hefty bottle the biggest offender.

Cleaner Cars, A to D

The Obama administration has proposed new stickers for cars and light trucks that will make it easier to see whether you are buying a fuel-efficient one or a guzzler, and how much it contributes to global warming. The stickers are a symbol of how far this country has come in providing a wider range of environmentally responsible choices to help ensure cleaner air and a healthier planet.

L.A. mayor, Latino activists take on oil companies over Proposition 23

They say the ballot initiative to suspend the state’s climate change law would hurt low-income communities already suffering the most from pollution.

Jeff Rubin: High energy prices make Copenhagen green

There is certainly much to be said for Denmark’s leadership in green energy. While North American carbon emissions have risen by around 30 per cent since 1990 (the reference point for the Kyoto Accord), Denmark’s emissions are actually lower than they were two decades ago. That’s generally ascribed to the fact that a world-leading 20 per cent of the power generated in Denmark comes from wind.

Less commonly known is the source of the other 80 per cent. I was surprised to discover that it comes from good old King Coal. In fact, coal’s share of power generation in Denmark’s power grid is basically the same as it is in China.

Tiny creatures reveal ancient sea levels

“It was a very big surprise,” says David Barnes, lead author of the study at the British Antarctic Survey, of the find of similar bryozoans 2400 kilometres apart in seas on either side of the West Antarctic ice sheet, which is 2 kilometres thick.

“The most likely explanation of such similarity is that this ice sheet is much less stable than previously thought and has collapsed at some point in the recent past,” he says.

“And if the West Antarctic ice shelf has been lost in recent times we have to re-think the possibility of loss in future with climate change.”

If one wants to be taken seriously in the world of policy analysis, one should at least use an internally consistent framework. This consideration, apparently, has not troubled Mr. Reidl.

To quote from The fatal flaw of Keynesian stimulus, in the Washington Times:

Last week, the Congressional Budget Office released a report claiming that the $814 billion “stimulus” has added 3.4 million net jobs.

…

Such implausible analysis does not come from actually observing the post-stimulus economy. Rather, it comes from Keynesian economic models that have been programmed to conclude that government spending injects new dollars into the economy, thereby increasing demand and spurring economic growth. In other words, these models are programmed to conclude that stimulus spending always creates jobs and growth, no matter how the economy actually performs.

Well, not quite. As I described in this post, there are a variety of ways in which multipliers are obtained. Oftentimes, the impacts are estimated either directly or indirectly, by estimating the marginal propensity to consume. The article continues:

But there is one problem with the government stimulus theory: No one asks where Congress got the money it spends.

Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.

It is intuitive that government spending financed by taxes merely redistributes existing dollars. Yet spending financed by borrowing also redistributes existing dollars today. The fact that borrowed dollars (unlike taxes) will be repaid some years later does not change that.

Here, I think Mr. Riedl is invoking Ricardian Equivalence, despite the fact that there is no empirical evidence, to my knowledge, that validates pure Ricardian Equivalence (actually, Ricardian equivalence wouldn’t necessary hold for government spending on goods and services, anyway). Now, at this juncture, I thought that he might be invoking a real business cycle model, or an older, nonstochastic version of the RBC, namely a flex price Classical model. But then the next paragraph reads:

Some believe stimulus spending is the mechanism by which the Federal Reserve injects new dollars into the economy. Yet the Fed could run the printing press and then inject those dollars into the economy by buying existing bonds (with mostly inflationary results). It doesn’t need an expensive stimulus bill to conduct monetary policy.

Accepting that the Fed can stimulate via monetary policy then implies either (1) sticky prices so an expansionary monetary policy can affect the real interest rate, or (2) a financial accelerator model such that collateral constraints or some other financial rigidity holds. In the latter case, it seems prima facie that Ricardian Equivalance cannot hold.

Next, I was thrown for a loop, because Mr. Riedl seems to conflate real saving and the monetary multiplier. He argues that government deficits can only be financed by foreign saving, private saving and “idle saving”. This he describes thus:

Idle savings. The only government spending that truly increases current purchasing is the amount that would have otherwise sat idle in safes and mattresses. Those are the only dollars not already circulating through the economy as consumption, or through the financial markets as investment spending.

Idle savings are rare. People and businesses generally invest or bank their savings, where the financial markets transfer them to other spenders. Banks that receive savings either lend them out to a spender, or (when afraid to loan) invest them conservatively to earn some interest. They are not hoarding customer deposits in massive vaults (beyond the required cash reserves).

This is an odd conflation of saving, measured as a flow, and financial assets. But lets take the equation at face value, there is an incredibly counterfactual observation that there no reserves are behing held in excess of required cash reserves. According to the St. Louis Fed, excess reserves are now approximately $1 trillion dollars. Well, no need for facts to get in the way of a good polemic.

Mr. Riedl’s main point is:

All government stimulus spending requires first borrowing dollars that would have otherwise been applied elsewhere in the economy. The only exception is money borrowed from “idle savings,” which for reasons described above likely constitute a minuscule portion of the $814 billion stimulus.

As I’ve mentioned here and elsewhere, this is true in a full employment model. (I’m working off of textbook models; move to coordination models, or allow monopolistic power, and you have lots of other inefficiencies arising).

Mr. Riedl concludes:

Economic growth requires raising worker productivity to create more goods and services. Government stimulus spending represents a naive “magic wand” attempt to create purchasing power and wealth out of thin air.

No wonder the unemployment rate remains high.

Well, if we’re in a Classical world, then there is no involuntary unemployment. If we’re in a New Classical world, then whatever involuntary unemployment exists is not systematic. If there is involuntary unemployment, then there are resources that are not being utilized, and putting them to use naturally raises productivity (remember labor productivity is defined as output per man hour).

It pains me to say that Mr. Riedl is a graduate of the University of Wisconsin, in economics and political science.

Postscript: Here is Deutsch Bank’s assessment of the impact of the ARRA on the growth rate of GDP.

Figure 1: Dobridge, Hooper, Slok, Sufian, “The growing risk of fiscal drag in the US,” Global Economic Perspectives, New York: Deutsche Bank, July 28, 2010.

Level impacts are depicted in this post. Here is CBO’s latest assessment.

Read more….

Fortune Magazine questions the usefulness of government programs to aid struggling homeowners:

It’s easy to see the need for such programs. Theoretically, they keep people in their homes and bring some stability to fragile housing market. But the plethora of programs announced since the housing crisis started have largely been failures, suggesting that any effort to fight foreclosures and boost home sales is going to be a futile one. …

Not even record low mortgages rates have boosted home sales or enticed a debt-weary public. Of course, this doesn’t seem much of a shocker. Experts say home prices — which have fallen by more than 30% since 2006 — are still inflated by 15% to 20% in many areas.

So why try to prop up prices any longer with federal programs? …

Evidence is mounting that government interference in the housing market might be doing the broader economy more harm than good, at least for the long-term. …

The few who are buying homes now might likely be overpaying for them. And many latching onto their properties are being convinced it’s okay to continue trying to pay off a home they can barely afford — echoes of the homeownership encouragement that led us into the bubble in the first place. …

Paving the way for a true market correction would not be easy to endure — letting home prices free-fall is a scary thought. But is a gradual decline that could prolong real economic recovery really any easier to stomach?

Read more….