Tuesday Twosome

Kiki Dee and Elton John

Don't Go Breaking My Heart

Monetary Policy Cannot Make Up for Other Blunders

"Many proponents of quantitative easing (QE) appear to be highly confident in its effectiveness despite the absence of supporting evidence. It is likely that many supporters of QE do so because to do otherwise would be to admit that we have reached, or are very near the limits of, monetary policy. Unfortunately, while QE may enable the Fed to finesse the zero "bound", the only existing evidence strongly suggests the effectiveness of unconventional monetary policy is waning. It should not be surprising, if we have reached the limit of monetary policy. It has been the go-to policy to stimulate growth. US tax policy is best explained as an effort to garner campaign contributions despite deleterious effects on growth, fairness and efficiency. It has also encouraged the buildup of debt and leverage, while discouraging saving and equity-financed investment. The expenditure side of fiscal policy has been reduced to partisan-seniority-determined allocations of pork. Regulatory policy has become a means of placating valued constituencies and expanding moral hazard incentives. Trade policy is non-existent. Energy policy is non-existent. Perhaps it is time to expect less from monetary policy and demand more from other policies and policy makers."

--Christopher Whalen, Institutional Risk Analytics

Getting Down(stream) and Dirty

[courtesy Lewiston Sun Journal]

Volunteers met Saturday and removed debris that was diverting the outlet stream from Worthley Pond. Whole docks that had washed down the stream were removed along with other debris. The Peru Selectmen had asked for help, and about 20 people showed up, some with equipment for moving the larger pieces.

photo: Mary Standard

Incredible Shrinking GDP

The Commerce Department reported this morning that the U.S. Gross Domestic Product grew at an annualized rate of 1.6% during the second quarter, lower than the 2.4% initially projected a month ago and lower than the 3.7% reported for the first quarter. Take out the build in inventories, and you have real final sales growing at a meager 1%. The economy is clearly stalling. Most of the Q2 growth came in April, and it is likely that by the start of Q3 growth was flat to negative. How can we tell? Look here:

Banks continue to reduce their lending to businesses (above)...


...and instead are parking their money in U.S. Treasuries.
Risk OFF!

Jobs are disappearing once more...


MBA Purchase Index

reducing the demand for new home loans...


...and therefore sales of new homes (lowest since records began).
Fallout:
David Rosenberg of Gluskin Sheff expects another 3 to 4 million jobs to be lost in the construction industry.

The wild card in the debt pyramid? Looming sovereign defaults:

Spread between Greek and German 10-Year Bonds

Back to flash-crash highs; investors are nervous.

U.S. Peso At Risk

John Hussman, "Why Quantitative Easing Is Likely To Trigger a Collapse of the U.S. Dollar"

[excerpt:]

[T]he policy of quantitative easing is likely to force a large adjustment on the U.S. dollar because the Federal Reserve is choosing to lay a heavier hand on the Treasury bond market than would result from economic conditions alone. The resulting shift in interest rates and long-term inflation prospects combine to dramatically reduce the attractiveness of the U.S. dollar. A significant and relatively abrupt devaluation is then required, in an amount sufficient to set up expectations of a U.S. dollar appreciation over time....

So the argument here is... that we are running a fiscal policy that is long run (though not short-run) inflationary, and that the monetary policy of quantitative easing prevents longer term interest rates from acting as an adjustment variable... By suppressing Treasury yields, the Fed forces the exchange rate to bear the full weight of the adjustment....

Good policy is not rocket science. It begins with the refusal to make people pay for mistakes that are not their own. This economy continues to struggle with a fundamental problem, which is that debt obligations exceed the ability to service them. While policy makers have done everything to preserve the patterns of spending and consumption that created the problem in the first place, we have done nothing to restructure those obligations.

Complete article viewable at HussmanFunds.com.

And You Thought GOLDMAN Was the Villain

David Stockman, "How PIMCO Is Holding American Homeowners Hostage"

[excerpt:]

It turns out that the real vampire squid wrapped around the face of the American taxpayer isn't Goldman Sachs after all. Instead, it's surely the Pacific Investment Management Co. As overlord of the fixed-income finance market, the latter generates billions annually in effort-free profits from its trove of essentially riskless US Treasury securities and federally guaranteed housing paper. Now Pimco wants to swell Uncle Sam’s supply of this no-brainer paper even further -- adding upward of $2 trillion per year of what would be “government-issue” mortgages on top of the existing $1.5 trillion in general fund deficits.

This final transformation of American taxpayers into indentured servants of HIDC (the Housing Investment & Debt Complex) has been underway for a long time, and is now unstoppable because all principled political opposition to Pimco-style crony capitalism has been extinguished... The HIDC subsidy system has been doubly perverse. Whereas the nation lived way beyond its means by saving too little at home and borrowing too much abroad, even the meager savings we did generate were artificially channeled into the least-productive investments. Thanks to the pervasive HIDC subsidy system we now have big, new houses and small, aging factories....

Pulling the plug on HIDC will rescue millions of households from mortgage-payment slavery and put them into a buyer's market for rented-housing services -- a social welfare gain under present circumstances. To be sure, they'll lose their credit and probably their credit cards in the process. But the days of living off the housing ATM and bank-issued plastic are over for the American people anyway. Creating an honest financial environment where households are required to rebuild their balance sheets and consume within their means isn't a disservice or injustice to anyone.

Complete article viewable at Minyanville.com.

Paul Simon and Linda Ronstadt

Under African Skies

Quote for the Week, Aug. 22-28, 2010

Are you going to vote to have a war or not? If you aren't please tell me how you are going to help to not have a war.

--Samantha Smith, age 10, to Soviet President Yuri Andropov, 1982

Tuesday Twosome

Sarah McLachlan and Bryan Adams

Don't Let Go

Heavy Hand of Government Applies Chokehold

Jeff Harding, "The Dodd-Frank Wall Street Reform
and Consumer Protection Act: The Triumph of Crony Capitalism"

[excerpt:]

The new financial overhaul bill is the greatest government takeover of the financial sector of the economy since the National Recovery Act of 1933 when Franklin Roosevelt attempted to introduce central planning in America.

More than just a new law, the Dodd-Frank “Wall Street Reform and Consumer Protection Act” (the "Act") gives government a relatively free hand to set prices and wages, to make business decisions, to promote or eliminate businesses, and to break up businesses. It establishes a large new bureaucracy to enable the government to dictate its wishes to the industry....

While the new law has been signed by the President, it hasn't yet been written. That task will be the job of federal mandarins, the career lawyers and economists inside and outside of government who live off of government regulation. As such the ultimate consequences of this Act are unknown and won't be fully known until years later after the regulations have been written, agencies are established, and power is distributed among the bureaucrats....

This revolving door between Washington and Wall Street allows people attracted to power and who are skeptical of the ideals of a free market, to dominate economic policy for their benefit. One way to say this is that it creates a partnership between the financial sector of the economy and the government (which is the controlling partner in this relationship). In the 1930s this type of political system was greatly admired in Washington. Today this system has evolved into “crony capitalism,” an oligarchic structure maintained by the Wall Street-Washington Financial Complex to perpetuate itself.

Complete article viewable at Minyanville.com.

Biggest Ponzi Scheme Ever?

Laurence Kotlikoff, "U.S. Is Bankrupt and We Don't Even Know"

[excerpt:]

The International Monetary Fund has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.” ...To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act....

[The IMF] has done its homework. So has the Congressional Budget Office, whose Long-Term Budget Outlook, released in June, shows an even larger problem. Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future....

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Complete article viewable at Bloomberg.com.

America Goes Dark

Unemployment metastasizes from county to county,
January 2008 to May 2010.

Tuesday Twosome

Gordon Waller and Peter Asher

A World Without Love

Our Wad Is Shot

Is it or isn't it? The Great Recession of 2008, I mean. According to the chart above, it's been over for the past year. The chart shows four consecutive quarters of sequential growth in Gross Domestic Product. Happy days are here again, right?

Not exactly. Despite stimulus spending by the federal government and quantitative easing by the Federal Reserve, the rebound in GDP has amounted to little more than a dead-cat bounce, falling 1% short of the pre-recession peak recorded in the fourth quarter of 2007. In other words, we have yet to gain back all that we had lost. This explains why Maine's general-fund revenues for FY 2010 (which ended on June 30) were down 2% from the year before. The two biggest drivers of GF revenues, the sales tax and the individual income tax, were down 2.6% and 4.9% respectively. Some recovery.

A "normal" recovery in the post-WW2 era, as David Rosenberg of Gluskin Sheff points out, should be far more robust. Ten quarters after the onset of a recession, GDP usually breaks out to a new high that is on average 8% above the prior peak, not 1% below. This year's Q2 number of +2.4%, released last Friday, is particularly disappointing not only because the pace of growth is slowing (already), but also because almost half the growth was due to a build in unsold inventories. Real final sales (GDP ex inventories) have grown just 1.2% in the past year--in Rosenberg's words, "the weakest revival in recorded history."

Leading indicators suggest that GDP growth will be flat-to-negative by Q4, which means that Maine faces more belt-tightening in FY 2011.

Hidden Costs Lead to Bad Choices

Bruce Mohl, "Green Power Costs Shouldn't Be in the Dark"

[excerpt:]

GREEN POWER curbs greenhouse gas emissions, reduces our reliance on fossil fuels, and has the potential to create new industries and jobs. But it’s not cheap, and consumers footing the bill for green power have a right to know what it costs....

The distribution charge on customer utility bills is ostensibly the cost of delivering electricity to homes. But it has become a dumping ground for all sorts of green power charges, including the above-market cost of long-term renewable power contracts as well as the tab for utility solar installations, smart grid pilot projects, and other programs subsidizing renewable energy. Even the fees utilities collect for signing green power contracts are rolled into the distribution charge.

The cost of the state’s green initiatives should be separated out and clearly identified, either on customer utility bills or separate bill impact statements. That way consumers can decide if the environmental benefits of green power are worth the extra cost. If state officials want consumers to embrace a green future, they have to be truthful about what that future costs.

Complete article viewable at the Boston Globe.

Tuesday Twosome

Ian and Sylvia Tyson

Four Strong Winds

Paddling around the Pond

Worthley Pond, 08-02-2010

Rapid River, Slow Recovery

Maine waters soothe wounded warriors. Story.

[Courtesy Boston Globe]