U.S. Goverment, Public Finance, Gold, Bonds, Trends and Economy
Politics / US Politics May 26, 2009 - 12:18 PM GMTBy: Michal_Matovcik
Government:
George Washington: “[Government] has no more right to put their hands into my pockets, without my consent, than I have to put my hands into yours…”
Public Finance
- OBAMA in interview: “Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we’ve made on health care so far. This is a consequence of the crisis that we’ve seen and in fact our failure to make some good decisions on health care over the last several decades.”
- The Obama Administration projects deficit to rise another $1.85 trillion in 2009 (13% of GDP) and yet another $1.4 trillion in 2010. The Congressional Budget Office projects almost $10 trillion in additional debt from 2010 through 2019. Just last January the 2009 deficit was estimated at “only” $1.2 trillion. Things have gone downhill fast.
- But there is reason to be concerned about those estimates, too. The CBO assumes a rather robust recovery in 2010, with growth springing back to 3.8% and then up to 4.5% in 2011. Interestingly, they project unemployment of 8.8% for this year (we are already at 8.9% and rising every month) and that it will rise to 9% next year. It will be a strange recovery indeed where the economy is roaring along at 4% and unemployment isn’t falling. John Mauldin
- Krugman has advocated even larger deficits than what are being run, the printing of more money, large tax increases, and huge increases in government spending. And he calls that “responsible.” Well, I call it madness. William Anderson
- The deficit in 2010 is almost 10% of GDP. The average proposed deficit is almost a $1 trillion average for the next ten years. Ten years from now, the deficit is projected to be $1.2 trillion. And that is if government costs do not go up and inflation only averages 1.1% for the next six years. Who will buy this debt? Are there any reserves abroad to finance this huge US debt?
Europe
- “As we have repeatedly said, Spain is set for a long, painful deflation that will manifest itself via a spectacularly high unemployment level, a collapse and general banking insolvencies. Consider this: the value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to €470 billion. That’s almost 50% of Spanish GDP. Most of these loans will go bad.
- European banks have assets of about 330% of their GDP, compared to US banking assets, which are about 50%. They have over $700 billion in loans to Asian (which are watching their exports collapse) and $1.3 trillion in loans to Eastern Europe, which is in a very serious recession, and so many of those loans are simply not going to be worth anything. Simply put, there is going to be a need for massive amounts of money to bail out European banks, or we’ll watch their economies simply implode. Where is the money for the bailouts going to come from? Germany? That will be a tough sell politically in a country that is in a much worse recession than the US. How do you tell your citizens you need to bail out banks in other countries with their tax dollars? Italian and Austrian banks are going to need a lot of capital, more than their governments can pay. It is going to be a very tough problem. John Mauldin
US dollar
- China and Brazil are moving to do their trades in their own currencies rather than dollars. One minus for US dollar in the long-run.
Jobs Market
- In 16 months the government admits that 5.7 million jobs have been lost. In the previous 8 years we lost over 5 million. Just to show you how serious this is, in 8/1981 to 12/1982, we lost 2.8 million jobs. In 3/2000 to 5/2002 we lost 2.2 million. Over 9 years we have lost 10.7 million jobs “officially.” We’ll never know what the real figure was.
Gold Market
- The present administration has set a new and unfamiliar course for America. The demands of labor unions now supercede these of debt holders. This move will haunt the American capital markets far into the future. Centuries of legal precedent have been overturned by executive fiat. Bond buyers will be very careful what they buy in the future and how long they hold the bonds. The sanctity of contract no longer exists. There no longer is a rule of law. The law is what the President says it is. We can imagine the negative affect this is going to have on investment by foreigners in the US as well as foreigners further holding of dollars. Capital will now feel unsafe in America and you can expect capital to flee such a capricious government. America is no longer the safest harbor for capital. This capital will now begin to move elsewhere and into gold. Global Research
Bond Market
- The interest yield on 10-year US Treasuries – the benchmark price of long-term credit for the global system – jumped 33 basis points last week to 3.45pc week on contagion effects after Standard & Poor’s issued a warning on Britain’s “AAA” credit rating.
- The yield has risen over 90 basis points since March when the US Federal Reserve first announced its controversial plan to buy Treasury bonds directly, a move designed to force down the borrowing costs and help stabilise the housing market.
- The Obama administration needs to raise $2 trillion this year to cover the fiscal stimulus plan and the bank bail-outs. It has to fund $900bn by September. FED money printing needs accelaration, there is no question about it. God Bless America.
Trends
- Healthcare: the last year of life contains 30% of individual life health costs. These trends will become more obvious as baby boomers move out of workfoce.
- Agriculture: as for likening agriculture today to oil in 2001-2002, an investor’s pulse quickens. We all know the great run oil stocks had as the price of oil sprinted from under $30 to a peak of $143 per barrel. Investors made hundreds-of-percent gains – even thousands-of-percent gains. What most investors forget is that oil prices halved from 2000 to the bottom in 2001 before the great run-up. The same sort of setup seems to exist in agriculture.
- “I believe one should look for areas in which there is underinvestment, low leverage and undersupply. Agriculture is one of the very few sectors globally that currently face supply shortages. The biggest reason to get excited about agriculture is to look at the stocks-to-use ratio, which measures how much supply is on hand versus how much we use.” McLornan
- In fact, the International Grains Council (IGC) predicts a fall in total wheat output in 2009-10. The IGC predicts global wheat output of 650 million tons, down by 5% from the previous year. The largest declines are seen in the European Union, the U.S., China, Russia, and Ukraine. “Although conditions in the Northern Hemisphere are generally favorable,” the IGC says, “production is likely to fall sharply.”
Economic Theory
- By eliminating intellectual monopoly and by liberalizing markets, we can encourage further innovation and greater prosperity.
- By paying more for a product the equivalent of which is offered at lower cost from outside the country, you are actually subsidizing domestic inefficiency, which is certainly your right, but it’s not a viable business strategy or public policy to count on that effect to sustain itself over the long haul.
- In their 2008 book Against Intellectual Monopoly, economists Michele Boldrin and David Levine dropped a bombshell that will, I hope, overturn the consensus about rights to ideas. Using carefully developed theory and a host of real-world examples, they show how patents actually reduce, rather than encourage, innovation. Innovators like steam engine pioneer James Watt, devoted enormous amounts of time and energy to defending monopoly rights rather than to creating new value. Innovation and growth proceeded apace once the patents expired. In Boldrin and Levine’s opinion, this delayed the onset of modern economic growth.
Good luck,
Michal Matovcik
www.absolutideas.com
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