As we discussed here and here, at yesterday's Ira Sohn Conference, David Einhorn gave a speech entitled "Good News for the Grandchildren" about why sovereign debts, huge structural budget deficits, and debt monetization/QE/quantitative easing will matter for our generation and will have to be dealt with well before our grandkids' time.
It was an excellent speech. Below is the unabridged version. Enjoy. Think gold.
David Einhorn - Greenlight Capital - Ira Sohn Conference Speech 2010 - Good News For The Grandchildren
Showing posts with label Deficit. Show all posts
Showing posts with label Deficit. Show all posts
Thursday, May 27, 2010
Tuesday, May 11, 2010
Tuesday, March 02, 2010
Senator Jim Bunning Folds
Well, I guess he got what he wanted. He managed to get the Senate to sacrifice its "black liquor" subsidy to pay for the unemployment extension. At least he had principles, even if the fireworks didn't fully manifest. It feels somewhat anti-climactic (though perhaps not to holders of Boise warrants - you know who you are).
I'll always remember Bunning as "that guy that held up the Senate at gun point...and retired his seat creating an opportunity for Ron Paul's son Rand Paul to be elected to the U.S. Senate." Ah, you remember him, don't you? You know, That Guy? Oh, yeah, That Guy.
From this WSJ article:
I'll always remember Bunning as "that guy that held up the Senate at gun point...and retired his seat creating an opportunity for Ron Paul's son Rand Paul to be elected to the U.S. Senate." Ah, you remember him, don't you? You know, That Guy? Oh, yeah, That Guy.
From this WSJ article:
WASHINGTON—The Senate Tuesday reached a deal to lift Sen. Jim Bunning's blockade of a bill to extend unemployment benefits, following new moves by Mr. Bunning's fellow Republicans to distance themselves from his tactics.
The agreement allowed Mr. Bunning (R., Ky.), who had complained that the $10 billion bill was not paid for, to offer an amendment that would fund the legislation by rescinding a tax credit for a paper manufacturing byproduct.
His amendment was expected to fail later Tuesday night. After that vote, Mr. Bunning was set to lift his objection to the underlying bill, which was expected to pass.
Mr. Bunning argued that the unemployment bill violated congressional rules requiring new initiatives to be paid for. Democrats said the extension was emergency legislation, exempting it from those rules. The public relations battle appeared to be playing out in the Democrats' favor as more than 100,000 jobless workers saw their unemployment benefits dry up this week.
Democrats also agreed to allow Mr. Bunning to offer two amendments on Wednesday to a longer-term extension of unemployment benefits and other programs. Both amendments are expected to propose ways of paying for that larger measure.
After the deal was reached, Mr. Bunning reiterated his argument that federal spending was out of control.
"If we cannot pay for a bill that all 100 senators support, how can we tell the American people with a straight face that we will ever pay for anything?" he said. "That is what senators say they want, and that is what the American people want."
Democrats said Mr. Bunning had been offered the same deal last week but refused to take it. "The real question in this debate is who we are as a nation," said Sen. Richard Durbin (D., Ill.). "Do we care about these people, these breadwinners who are down on their luck?"
Mr. Durbin objected to Mr. Bunning's proposal to pay for the bill by rescinding a tax credit for "black liquor," a paper manufacturing byproduct, saying this revenue source was already set aside for another measure.
Mr. Bunning had held up the unemployment-benefits extension by objecting to Democrats' "unanimous consent" request to advance the legislation, a routine procedure that requires all senators to go along.
Monday, March 01, 2010
Jim Bunting Gives The Finger To...Well, To Everyone
...and we here at TILB fucking love it.
Before reading the below article, I didn't know jack about Jim Bunting save for one thing: he is retiring and his resignation has paved the way for the very real possibility that Ron Paul's son Rand Paul is elected to the U.S. Senate as Bunning's replacement.
That fact alone makes Bunning a hero in our eyes: even accidentally paving the way for potentially putting a Paul in the Senate is deserving of hero's praise.
But now we've learned one additional piecce of information about Senator Jim Bunning: he is single handedly holding up the extension (yet again!) of socialized unemployment and healthcare benefits. Workers already have had them extended from 26 weeks of state provided benefits to 26 weeks of state benefits plus 73 weeks from the Federal government! WTF!
Now without this extension, everyone is getting cut off once their current tier of benefits expires. While obviously it sucks tremendously for needy unemployed people, it is principled. All Bunting is saying is, (paraphrasing) "we need to cut an equal amount from somewhere else in the budget. I'm not going to be responsible for increasing the deficit any further given we already can't pay for what we have."
It's literally 99 to 1 in the Senate but it takes unanimity to extend an existing law without going through the traditional legislative process of actually passing a new law. As The Great Jim Bunning said on the Senate floor:
Oh, and because he's retiring and is basically untouchable as a result, he's literally flouting his opposition, including flicking off the media. Further, he actually told the Honorable Gentleman from Oregon, "Tough shit" when Senator Jeff Merkley criticized Bunning's stance.
I don't want to know anything else about the guy. Don't ruin this image of perfection.
I'm sure learning additional information would sully him in my eyes. But for now, he's perfect. On the one hand, he's going Mantan Moreland on them and putting his dick in the Senate's proverbial mashed potatoes while providing space for Rand Paul on the other.
Genius.
Stay strong, Jim. Stay strong.
Here's the Yahoo! article.
[HT: TD]
Before reading the below article, I didn't know jack about Jim Bunting save for one thing: he is retiring and his resignation has paved the way for the very real possibility that Ron Paul's son Rand Paul is elected to the U.S. Senate as Bunning's replacement.
That fact alone makes Bunning a hero in our eyes: even accidentally paving the way for potentially putting a Paul in the Senate is deserving of hero's praise.
But now we've learned one additional piecce of information about Senator Jim Bunning: he is single handedly holding up the extension (yet again!) of socialized unemployment and healthcare benefits. Workers already have had them extended from 26 weeks of state provided benefits to 26 weeks of state benefits plus 73 weeks from the Federal government! WTF!
Now without this extension, everyone is getting cut off once their current tier of benefits expires. While obviously it sucks tremendously for needy unemployed people, it is principled. All Bunting is saying is, (paraphrasing) "we need to cut an equal amount from somewhere else in the budget. I'm not going to be responsible for increasing the deficit any further given we already can't pay for what we have."
It's literally 99 to 1 in the Senate but it takes unanimity to extend an existing law without going through the traditional legislative process of actually passing a new law. As The Great Jim Bunning said on the Senate floor:
"If we can't find $10 billion to pay for something that we all support, we will never pay for anything on the floor of the U.S. Senate."Amen Saint Bunning. Amen.
Oh, and because he's retiring and is basically untouchable as a result, he's literally flouting his opposition, including flicking off the media. Further, he actually told the Honorable Gentleman from Oregon, "Tough shit" when Senator Jeff Merkley criticized Bunning's stance.
I don't want to know anything else about the guy. Don't ruin this image of perfection.
I'm sure learning additional information would sully him in my eyes. But for now, he's perfect. On the one hand, he's going Mantan Moreland on them and putting his dick in the Senate's proverbial mashed potatoes while providing space for Rand Paul on the other.
Genius.
Stay strong, Jim. Stay strong.
Here's the Yahoo! article.
[HT: TD]
Wednesday, December 09, 2009
The Singularity
We believe the world is walking a tight rope of low rates driven perceived safety. Reality is something uglier. Click here for our definitive take on The Singularity risk.
Saturday, December 05, 2009
Bread Is Money And Money Is Bread
"We have free markets."
This mantra is unquestioned around the world in the context of The United States of America. Nobody prevents you from buying the vast majority of products you desire and nobody prevents you from selling the vast majority of products. In broad terms, you can generally do what you wish with your money.
So, the mantra is true: we have free markets.
Or, perhaps before answering the question, we should allow our mind to churn a bit.
When asked by Congress and when giving speeches, Chairman Bernanke affirms his belief in the need for free markets. I am certain if you asked if he was in favor of price fixing, he would laugh at you and say, "of course not. The freer the better, (with certain 'protections')."
And yet, as chairman of the Federal Reserve, he is of course the world's largest price fixer. He controls the monopoly printing control of U.S. dollars and he controls the price and availability of these dollars. He controls who gets newly printed dollars and who does not. These dollars are backed only by the Full Faith and Credit of the United States, rather than by anything tangible. As such, these unbacked currencies are referred to as "fiat" money, as they are commanded into society be fiat, rather than choice.
Bernanke controls the price of dollars through Fed Funds rate implementations (and other similar tools) and he controls the availability in any number of manners, but suffice it to say a dollar's legal name is a Federal Reserve Note, so each dollar is theoretically a liability of the Fed and thus created always and everywhere by the Fed (banks sort of also create dollars through fractional reserve banking, but this is with the Fed's explicit blessing and under the Fed's control).
The price and supply of dollars is not set via market forces, it is set via the collective decision of a dozen or so bureaucrats sitting in the Washington, DC headquarters of the Federal Reserve.
In practice, the majority of those bureaucrats has never dissented from the opinion of the Fed Chairman, so Bernanke effectively dictates the price and supply of money with the advice of mandarins.
Luckily, money's not a very important instrument, so this seems like it shouldn't cause problems.
Everyone knows that is a ridiculous statement, but have you ever thought about what "money" is? I don't mean "dollars," I mean "money," in all its forms.
Money is simply a store of value, of man's productive output. When man innovates and produces above his cost of capital, money becomes more valuable because the same amount of money can now acquire more, different, and/or better things.
Money is exchangeable for goods and services and thus money represents some amount of claim on goods and services. As such, things like bread, milk and financial advice are all embodied in money. It is a fractional claim on everything.
Each transaction in life represents two sides of the same coin. While we generally think of a transaction as money buying bread, another way to think of it is of bread acquiring money. As such, bread is money and money is bread. They are claims on each other. In essence, every good and service is a claim on some amount of other goods and services and money is simply the trusted lubricant in the transaction.
This brings us back to Chairman Bernanke's seemingly benevolent dictatorship of the price and supply of money.
Because bread is money and money is bread, what is Bernanke actually controlling the price and supply of? Is he only price fixing dollars?
Obviously not. He is using an incredibly blunt (albeit convenient) mechanism - the dollar - to price fix everything in the economy.
If you've never thought of the nature of money before, this should scare the absolute shit out of you.
One guy is in charge of all of this?
Further, the Fed is a largely independent body of unelected officials with no meaningful transparency or accountability to We The People. We have handed the economic nuclear football to a bearded Princeton theoretician and told him it would be grand if he didn't use it, or at least use it responsibly.
This is truly insane.
It also means we live in anything but a free market. We live in a market that is manipulated at all times and in damnable ways. Not only are dollars not created and priced via natural supply/demand dynamics, they are a form of money that is manipulated and used to the benefit of certain special interests at the expense of everyone else in an opaque system.
Given this backdrop, in some sense it is almost amazing these United States have been as successful as they have.
I attribute the success we have had to a few things, not least of which is the reality that every country on Earth (that I am aware of) uses a similar or worse methodology for creating and pricing their imposed form of money, so the dollar has not served as a meaningful comparative disadvantage. In fact, its status as the global reserve currency - which is now waning - has been a substantial advantage as it imposed our price control structure onto many nations and global transactions and allowed us to export a good portion of our inflation.
We also have historically had greater freedom from governmental control in other aspects of life than most nations, giving us a further competitive advantage of more freedom, even if incomplete. That gap too is waning as certain other countries grow their freedom and we are actively and aggressively shrinking ours.
Importantly, we built our reputation as a nation of freedom during a time that predated the Federal Reserve and had a reasonably well enforced classical gold standard. We still lean on this reputation today.
The fact that other countries have been more evil than we have is not exactly the stand on which we should endeavor to hang our hat.
We should understand the long-term implications of what it means to live in a society that suffers from governmental imposed price fixing in every market. Some implications are as follows:
1) we suffer a drought relative to freedom that we should have;
2) we can know for a fact that our scarce resources are misallocated and scarce investment capital is maldirected as time and time again has shown the optimal system for directing resources and capital is a reliable price system;
3) the long-term governmental incentive to inflate the currency supply is overwhelming as this form of taxation is largely hidden from sight and fiat money allows it limitlessly. Monetary inflation thus leaves elected officials less accountable than if a more straightforward tax was required. This monetary system thus helps (in the short- to medium-term) the government finance things that are difficult to pay for with new taxes due to their unpopularity like war and freedom encroaching bureaucracy;
4) certain private industries and citizens benefit - these beneficiaries are in essence the early holders of newly printed dollars before they've cycled through the system and impacted prices (e.g., banks, bank borrowers, and wealthy investors) at the expense of holders that see the new money later in the process (e.g., fixed income retirees and middle class workers);
5) we risk our competitive advantage to countries that are willing to be more free than us. Increases in true freedom have everywhere and always improved the lot of the people (see modern day China, for example); and
6) someday we should expect that the build-up of problems caused by the system lead to the system's failure. What that entails is potentially awful. Historically massive wealth loss, poverty, political upheaval, class warfare and actual war are on the menu.
So, have we actually lived in a free market economy during the last few decades, waking every morning to an improving society?
No, we have not. The market will continue to fight against the current system until it breaks, as freedom once held cannot be suffocated, it can simply be constrained. Market freedom is a core freedom and it demands the right to carve its own path.
We now know that bread is money and money is bread - that money, is in fact a small part of everything that can be acquired. We know that as new money is brought into circulation, it dilutes the per unit (e.g., per dollar) claim we have on all goods and services. We know the perverse incentives of fiat money and the near certain direction that fiat money's supply will progress.
With those important pieces of information, you should perhaps ponder whether you prefer holding a money that is 38 years old (the fully unbacked dollar came into being in 1971, after the pseudo-gold backed dollar suffered its demise upon Nixon's command) or whether you prefer a form of money that has been freely selected by individuals in every geography on Earth in which it existed for the last 6,000 years.
Perhaps fiscal discipline will return and monetary discipline will follow. Perhaps government officials will choose to tax less and spend even less in the coming years, easing the pressure on the Fed to debase. Perhaps the Fed will see the folly of its ways and halt or reverse the printing press actions of the past year. Perhaps these things will all happen in the next two or three years before our debt gets past the point of no return.
Perhaps.
But I know my preference:
Gold.
[For more on the meaning of money, read Francisco D'Anconia's brilliant speech linked here]
This mantra is unquestioned around the world in the context of The United States of America. Nobody prevents you from buying the vast majority of products you desire and nobody prevents you from selling the vast majority of products. In broad terms, you can generally do what you wish with your money.
So, the mantra is true: we have free markets.
Or, perhaps before answering the question, we should allow our mind to churn a bit.
When asked by Congress and when giving speeches, Chairman Bernanke affirms his belief in the need for free markets. I am certain if you asked if he was in favor of price fixing, he would laugh at you and say, "of course not. The freer the better, (with certain 'protections')."
And yet, as chairman of the Federal Reserve, he is of course the world's largest price fixer. He controls the monopoly printing control of U.S. dollars and he controls the price and availability of these dollars. He controls who gets newly printed dollars and who does not. These dollars are backed only by the Full Faith and Credit of the United States, rather than by anything tangible. As such, these unbacked currencies are referred to as "fiat" money, as they are commanded into society be fiat, rather than choice.
Bernanke controls the price of dollars through Fed Funds rate implementations (and other similar tools) and he controls the availability in any number of manners, but suffice it to say a dollar's legal name is a Federal Reserve Note, so each dollar is theoretically a liability of the Fed and thus created always and everywhere by the Fed (banks sort of also create dollars through fractional reserve banking, but this is with the Fed's explicit blessing and under the Fed's control).
The price and supply of dollars is not set via market forces, it is set via the collective decision of a dozen or so bureaucrats sitting in the Washington, DC headquarters of the Federal Reserve.
In practice, the majority of those bureaucrats has never dissented from the opinion of the Fed Chairman, so Bernanke effectively dictates the price and supply of money with the advice of mandarins.
Luckily, money's not a very important instrument, so this seems like it shouldn't cause problems.
Everyone knows that is a ridiculous statement, but have you ever thought about what "money" is? I don't mean "dollars," I mean "money," in all its forms.
Money is simply a store of value, of man's productive output. When man innovates and produces above his cost of capital, money becomes more valuable because the same amount of money can now acquire more, different, and/or better things.
Money is exchangeable for goods and services and thus money represents some amount of claim on goods and services. As such, things like bread, milk and financial advice are all embodied in money. It is a fractional claim on everything.
Each transaction in life represents two sides of the same coin. While we generally think of a transaction as money buying bread, another way to think of it is of bread acquiring money. As such, bread is money and money is bread. They are claims on each other. In essence, every good and service is a claim on some amount of other goods and services and money is simply the trusted lubricant in the transaction.
This brings us back to Chairman Bernanke's seemingly benevolent dictatorship of the price and supply of money.
Because bread is money and money is bread, what is Bernanke actually controlling the price and supply of? Is he only price fixing dollars?
Obviously not. He is using an incredibly blunt (albeit convenient) mechanism - the dollar - to price fix everything in the economy.
If you've never thought of the nature of money before, this should scare the absolute shit out of you.
One guy is in charge of all of this?
Further, the Fed is a largely independent body of unelected officials with no meaningful transparency or accountability to We The People. We have handed the economic nuclear football to a bearded Princeton theoretician and told him it would be grand if he didn't use it, or at least use it responsibly.
This is truly insane.
It also means we live in anything but a free market. We live in a market that is manipulated at all times and in damnable ways. Not only are dollars not created and priced via natural supply/demand dynamics, they are a form of money that is manipulated and used to the benefit of certain special interests at the expense of everyone else in an opaque system.
Given this backdrop, in some sense it is almost amazing these United States have been as successful as they have.
I attribute the success we have had to a few things, not least of which is the reality that every country on Earth (that I am aware of) uses a similar or worse methodology for creating and pricing their imposed form of money, so the dollar has not served as a meaningful comparative disadvantage. In fact, its status as the global reserve currency - which is now waning - has been a substantial advantage as it imposed our price control structure onto many nations and global transactions and allowed us to export a good portion of our inflation.
We also have historically had greater freedom from governmental control in other aspects of life than most nations, giving us a further competitive advantage of more freedom, even if incomplete. That gap too is waning as certain other countries grow their freedom and we are actively and aggressively shrinking ours.
Importantly, we built our reputation as a nation of freedom during a time that predated the Federal Reserve and had a reasonably well enforced classical gold standard. We still lean on this reputation today.
The fact that other countries have been more evil than we have is not exactly the stand on which we should endeavor to hang our hat.
We should understand the long-term implications of what it means to live in a society that suffers from governmental imposed price fixing in every market. Some implications are as follows:
1) we suffer a drought relative to freedom that we should have;
2) we can know for a fact that our scarce resources are misallocated and scarce investment capital is maldirected as time and time again has shown the optimal system for directing resources and capital is a reliable price system;
3) the long-term governmental incentive to inflate the currency supply is overwhelming as this form of taxation is largely hidden from sight and fiat money allows it limitlessly. Monetary inflation thus leaves elected officials less accountable than if a more straightforward tax was required. This monetary system thus helps (in the short- to medium-term) the government finance things that are difficult to pay for with new taxes due to their unpopularity like war and freedom encroaching bureaucracy;
4) certain private industries and citizens benefit - these beneficiaries are in essence the early holders of newly printed dollars before they've cycled through the system and impacted prices (e.g., banks, bank borrowers, and wealthy investors) at the expense of holders that see the new money later in the process (e.g., fixed income retirees and middle class workers);
5) we risk our competitive advantage to countries that are willing to be more free than us. Increases in true freedom have everywhere and always improved the lot of the people (see modern day China, for example); and
6) someday we should expect that the build-up of problems caused by the system lead to the system's failure. What that entails is potentially awful. Historically massive wealth loss, poverty, political upheaval, class warfare and actual war are on the menu.
So, have we actually lived in a free market economy during the last few decades, waking every morning to an improving society?
No, we have not. The market will continue to fight against the current system until it breaks, as freedom once held cannot be suffocated, it can simply be constrained. Market freedom is a core freedom and it demands the right to carve its own path.
We now know that bread is money and money is bread - that money, is in fact a small part of everything that can be acquired. We know that as new money is brought into circulation, it dilutes the per unit (e.g., per dollar) claim we have on all goods and services. We know the perverse incentives of fiat money and the near certain direction that fiat money's supply will progress.
With those important pieces of information, you should perhaps ponder whether you prefer holding a money that is 38 years old (the fully unbacked dollar came into being in 1971, after the pseudo-gold backed dollar suffered its demise upon Nixon's command) or whether you prefer a form of money that has been freely selected by individuals in every geography on Earth in which it existed for the last 6,000 years.
Perhaps fiscal discipline will return and monetary discipline will follow. Perhaps government officials will choose to tax less and spend even less in the coming years, easing the pressure on the Fed to debase. Perhaps the Fed will see the folly of its ways and halt or reverse the printing press actions of the past year. Perhaps these things will all happen in the next two or three years before our debt gets past the point of no return.
Perhaps.
But I know my preference:
Gold.
[For more on the meaning of money, read Francisco D'Anconia's brilliant speech linked here]
Monday, July 20, 2009
Third Failed Auction In China In Two Weeks
China again fails to sell the amount of bills it hoped to sell. This is getting relatively little press. This is the third failed auction for Chinese Treasuries of one term or another in two weeks. It is particularly worrisome given it is short-term paper. Imagine the buyer strike in long maturity offerings...
We believe this news spells danger for the US.
As we see demand for non-US auctions drying up (despite, arguably, a better currency in China) and the US Treasury continuing to ramp issuance volume, one cannot help but wonder where incremental demand for US Treasury absorption will come from (more than $2 trillion of incremental issuance in CY 2009). Simple math shows that even if all existing buyer cohorts increase their buying by enormous amounts, the funding gap in 2009 alone will be close to half a trillion dollars. Many people point to the growth in money market fund assets as the bridge. Of course, green shooters often claim those same money market dollars as there own when they talk about "all the excess cash sitting on the sidelines in money market funds". This alleged "excess" cash will apparently be able to fund both the US Treasury and serve as a catalyst for risk assets ("just wait until that money comes flooding back into small cap equities!"). Alas, both cannot happen without a substantial and unlikely increase in leverage.
Fed monetization is a virtual certainty.
As to the aforementioned failed auction in China, here are some highlights from Bloomberg. All emphasis added:
[HT CM]
We believe this news spells danger for the US.
As we see demand for non-US auctions drying up (despite, arguably, a better currency in China) and the US Treasury continuing to ramp issuance volume, one cannot help but wonder where incremental demand for US Treasury absorption will come from (more than $2 trillion of incremental issuance in CY 2009). Simple math shows that even if all existing buyer cohorts increase their buying by enormous amounts, the funding gap in 2009 alone will be close to half a trillion dollars. Many people point to the growth in money market fund assets as the bridge. Of course, green shooters often claim those same money market dollars as there own when they talk about "all the excess cash sitting on the sidelines in money market funds". This alleged "excess" cash will apparently be able to fund both the US Treasury and serve as a catalyst for risk assets ("just wait until that money comes flooding back into small cap equities!"). Alas, both cannot happen without a substantial and unlikely increase in leverage.
Fed monetization is a virtual certainty.
As to the aforementioned failed auction in China, here are some highlights from Bloomberg. All emphasis added:
China’s government failed to sell as much debt as it planned for the third time in two weeks on speculation the central bank will push up money-market rates to prevent bubbles in stock and property prices.
The finance ministry sold 18.51 billion yuan ($2.7 billion) of the six-month bills, less than the 20 billion yuan on offer, Chinabond said in a statement on its Web site. The average winning yield was 1.6011 percent, higher than the 0.85 percent rate at the last sale of 182-day bills on June 19.[rates double in one month?!?!]
Yields on similar-maturity treasury bills have risen 45 basis points this month on concern the country’s 4 trillion yuan ($585 billion) fiscal stimulus package will stoke inflation. Loans rose almost fivefold in June from a year earlier to 1.5 trillion yuan and the government yesterday reported that economic growth accelerated to 7.9 percent in the second quarter.
...
The Shanghai Composite Index has jumped 75 percent this year, a performance second only to Peru among 88 global stock benchmarks tracked by Bloomberg. Home prices in China’s major cities rose in June for the first time in seven months, the government reported last week. [money printing driving prices for "investment" assets]
...
Demand for debt is cooling as investors favor assets that will benefit most from the economic recovery and this month’s resumption of new shares sales prompts investors to free up cash. China State Construction Engineering Corp. said on July 13 it got approval for what may be the nation’s biggest initial public offering in two years. [in order to participate in IPOs in China, you have to set aside the case, so apparently many are pointing to this giant IPO as a demand drain from the auction]
The government barely met its sale target in a 28 billion yuan three-year debt auction on July 15, drawing bids for 1.16 times the amount on offer, after attracting insufficient demand in two sales last week. The so-called bid-to-cover ratio at today’s sale was 0.925 times, compared with an average of about 1.5 at successful sales this year. [trouble]
[HT CM]
Sunday, June 14, 2009
Nationalizing Healthcare At Only $120,000 Per Person!
HT: to ZeroHedge
Good news, dear reader, it appears a mere $600 billion in incremental tax increases are coming.
Even better news: that's just to pay for health care, much less the debacle that's going on now - forget the $2 trillion deficit we would have anyway.
Luckily, the plan is simply to further soak the rich (how wet can somebody get before they are thoroughly soaked?) and have five million people subsidize three hundred million.
Or, as the good folks at Zerohedge state it:
...sigh...
Someday, perhaps, Atlas will indeed shrug as even his capable shoulders can only bear so much burden. TILB mourns for America...
Good news, dear reader, it appears a mere $600 billion in incremental tax increases are coming.
Even better news: that's just to pay for health care, much less the debacle that's going on now - forget the $2 trillion deficit we would have anyway.
Luckily, the plan is simply to further soak the rich (how wet can somebody get before they are thoroughly soaked?) and have five million people subsidize three hundred million.
Obama has pledged that health-care changes won’t add to the deficit. To accomplish that, he’s proposed getting about $600 billion by reducing tax deductions available to the wealthy, and by trimming Medicare payments to insurance companies.He goes on to state that he understands that number is too big and there will have to be cuts. If past is prologue, he'll cut some nominal amount and then stomp for approvale at his grand achievemnt.
Or, as the good folks at Zerohedge state it:
Additionally as Obama has pretty much staked his political career on only raising the taxes of those who make over $250,000 per year. That's what - 4, maybe 5 million Americans? So, $600 billion divided by 5 million, that makes... oh, about $120,000 in tax increases per person.I'll note that is before those same people pay for the deficit/debt that already exists.
...sigh...
Someday, perhaps, Atlas will indeed shrug as even his capable shoulders can only bear so much burden. TILB mourns for America...
Wednesday, June 03, 2009
Moving Weights From Left Pocket To Right Pocket May Decrease Weight
In a NY Times article posted online today titled "Rising Interest on Nations’ Debts May Sap World Growth" a classic anti-Bastiat mistake is made. Somehow the headline author seems to believe that if countries pay more interest, the world will grow slower, as if the extra interest payments are remitted by these nations into an incinerator.
Of course, common sense tells us that that interest will go to lenders and the lenders will choose how to spend it as opposed to the debtor nation. This of course has no discernible impact on world growth (and may be a net plus as, on the margin, it takes spending decisions out of the hands of governments and puts it into more efficient private hands) though it may certainly depress the remitting country's growth (depending on where their interest payments flow to).
The article addresses a point made by TILB just last week when we wrote:
In any case, TILB Kenneth Rogoff is quoted in the aforementioned NY Times article (see below, heavily edited):
Of course, common sense tells us that that interest will go to lenders and the lenders will choose how to spend it as opposed to the debtor nation. This of course has no discernible impact on world growth (and may be a net plus as, on the margin, it takes spending decisions out of the hands of governments and puts it into more efficient private hands) though it may certainly depress the remitting country's growth (depending on where their interest payments flow to).
The article addresses a point made by TILB just last week when we wrote:
To date, nearly all of those symptoms have manifested in one way or another, but we believe the most damning symptom could be the first: if the Fed does indeed lose control of long bond yields, watch out.This of course all seems obvious when you think about it, but what's shocking is that so little attention is directed toward it.
The yield curve on any term longer than a few years has backed up a huge amount in the last few weeks. In fact, with the Fed's ZIRP still firmly in place, the 2s/10s spread has widened out to record width, surpassing Greenspan's early 90s gift to banks (please always keep in mind that is a taxpayer subsidy). From the Fed's perspective, the danger of long bond yields rising is that it has the potential to unwind a great deal of their efforts to improve credit conditions for term borrowers, especially home buyers/refi'ers.
Further, the back-up in rates will make it increasingly expensive for the Treasury to term out We The People's debt. For example, the party-agnostic CBO uses an average 3.0% Ten Year Treasury Note Rate for 2009 and 3.2% for 2010 for budgeting purposes (see PDF page 52 here - note they also are far too optimistic on tax receipts due to their delusional GDP and unemployment assumptions, which we've already blown past). With the 10 Year having backed up 100bps in the past two weeks to 3.61%, we are already in the process of blowing the CBO's budget (the 30 Year has similarly moved to 4.49%). It's worth noting that the 2s/10s spread is wide today not because of absolutely high 10s but because of artificially low 2s (due to the Fed's ZIRP). [data as of 5/27/09 close]
So that is the precipice. If longer rates continue to move up on the back of the enormous supply ($2 trillion deficit likely this year, as we predicted back in January when most people thought $1 trillion was likely), then the government will have three choices:
1) continue to issue the already planned volume of longer bonds at higher rates and blow through budget projections resulting in yet more debt needing to be issued and enduring a further credibility hit;
2) monetize the debt by having the Fed step in as a buyer of unlimited volume at a pre-determined level (say 3.5% on the 10s) and risk rapid debasement of the dollar; or
3) move down the curve toward the short end where rates are cheaper but take on roll risk of epic proportions.
My guess is some combination of All of The Above with a lean toward #1 and/or #2.
This is either Custer's last stand and we are about to be ambushed or it's a beautifully executed rear guard gambit by our Fed and Treasury, maintaining a strong-enough dollar while financing the deficit and arresting a credit crisis all at once.
My suspicion is the former.
If I am correct, there is a serious potential for all hell to break loose in the next year as the dollar gets obliterated from a purchasing power standpoint putting the Fed in one hell of a bind. They either deal with the dollar's weakness by tightening - which may precipitate a financial panic and prove Bernanke a liar for his apology to Milton Friedman - or they actively debase, calling into question the dollar's reserve currency status, punishing savers to help borrowers, and setting loose the inflation to end all inflations...which of course will ultimately force them to tighten.
In essence, under either scenario the Fed will have to tighten against their preferred policy. It is simply a question of when they do it and what type of pain we are interested in taking between now and then. Admittedly, this is not an attractive set of choices. I do not begrudge Bernanke his roll in history.
In any case, TILB Kenneth Rogoff is quoted in the aforementioned NY Times article (see below, heavily edited):
As governments worldwide try to spend their way out of recession, many countries are finding themselves in the same situation as embattled consumers: paying higher interest rates on their rapidly expanding debt.
Increased rates could translate into hundreds of billions of dollars more in government spending for countries like the United States, Britain and Germany.
Even a single percentage point increase could cost the Treasury an additional $50 billion annually over a few years — and, eventually, an additional $170 billion annually.
This could put unprecedented pressure on other government spending, including social programs and military spending, while also sapping economic growth by forcing up rates on debt held by companies, homeowners and consumers.
...
But in the last three weeks, the pace of the increase in the 10-year Treasury note’s yield has quickened, spurred by a Congressional Budget Office estimate that net government debt will rise to 65 percent of the gross domestic product at the end of fiscal 2010, from 41 percent at the end of fiscal 2008.
In 2009 and 2010, Washington will sell more than $5 trillion in new debt, according to Citigroup. A decade from now, according to the Congressional Budget office, Washington’s outstanding debt could equal 82 percent of G.D.P., or just over $17 trillion.
...
Under President Obama’s 2010 budget, total interest payments by the federal government could rise to $806 billion in 2019, from $170 billion this year, according to the Congressional Budget Office. Much of that projected increase is a result of higher government borrowing, but the forecast also assumes that the average 10-year note yield will increase to 4.7 percent.
...
“It’s a gigantic issue,” said Kenneth Rogoff, a Harvard professor and the co-author of a forthcoming book, “This Time is Different: Eight Centuries of Financial Folly.” “It leaves us very vulnerable to a global rise in interest rates that might be substantially beyond our control.”
Mr. Rogoff estimates that if the budget office’s debt estimate proves correct, every one percentage point increase in rates could eventually cost Washington an added $170 billion a year.
...
A year ago, under old budget and policy assumptions and before the financial crisis escalated, the Congressional Budget Office projected that outstanding federal debt would hit $5.3 trillion in 10 years.
“It’s an exaggeration of course, but it’s a little like what happened to the subprime borrowers,” Mr. Rogoff said. “People are just assuming the funding will always be there.”
...
Britain’s debt sales might seem less alarming than the multitrillion-dollar offerings from the euro zone and the United States. But Mark D. Schofield, global head of interest rate strategy at Citigroup in London, said, “It’s a huge increase in percentage terms, and it dwarfs anything else.”
Standard & Poor’s caught some traders and investors off-guard last month when it warned that Britain’s sovereign debt was in danger of losing its AAA rating, lowering the outlook to negative from stable. It was the first time since Standard & Poor’s initiated coverage of British debt in 1978 that the country received a negative outlook.
Britain’s government debt now equals 55 percent of G.D.P., but Standard and Poor’s estimates it could approach 100 percent by 2013.
...
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