As I continue report the facts on what is really going on in relationship to the economy, the happy talk continues. We have reached the point of recovery and the recession is over according to some. Really? The facts do not seem to support that conclusion, at least at the street level.
We have watched the markets expand consistently over the last month with bad metrics being reported from almost every important element of the economy. At the same time gold and silver is reaching record highs. This is just counter-intuitive to decades of financial history.
A number of economists would argue that the stimulus was simply not enough to accomplish the twin mission of preventing global financial systems from collapsing and kick starting the economy at the same time. How much of a boost to the U.S. recovery could another trillion dollars or two buy?
To battle the financial crisis, the Fed bought $1.7 trillion of longer-term Treasury and mortgage-related bonds, supplementing its pledge to keep interest rates near zero for a long time. All told, it helped stabilize a collapsing financial system and to avert what could have been a second Great Depression.
At the Fed’s August meeting it decided to reinvest maturing mortgage-debt in Treasuries to keep its balance sheet steady, a move many analysts saw as a precursor to more easing. Proponents of a re-launch of large-scale bond-buying say it will help prevent inflation expectations from falling and spur growth by further reducing borrowing costs for consumers and businesses.
According to Michael Feroli, Chief U.S. Economist, JPMorgan,” Skeptics say the economic recovery has just hit a weak patch. They argue that more easing could be ineffective in helping the economy, potentially damaging Fed credibility. An incremental drop in long-term yields may not be enough to force banks to stop hoarding safe-haven Treasuries and make loans to businesses instead, some analysts warn. Some policy-makers worry that more easing could fuel market imbalances or sow the seeds of sky-high inflation ahead.”
“My own view is that any radical balance sheet program would be seen by many as an act of desperation which would dampen business sentiment and depress non-financial borrowing even more,” said Wrightson ICAP Chief Economist Lou Crandall.
Fed bond purchases can have two effects. They can increase liquidity in strained markets and, by lowering yields, force investors to look for returns in riskier asset classes, helping to boost the supply of credit in the economy. In addition, some officials believe bond buying helps solidify trust among investors that the Fed will keep policy easy for longer, further helping to lower borrowing costs.
“If you show up and purchase assets when markets are stressed, you are not pushing back against much conviction so you can move prices more easily,” said Reinhart, the former Fed staffer. To get a significant effect in the Treasury market—where any new round of purchases would likely be centered—could be harder, says Mark Gertler, a professor at New York University.
“Evidence suggests it would take a huge purchase of long-term government bonds, maybe the whole market, to really have any effect, and the effect would be quite uncertain.” Rather than announcing such an eye-popping amount upfront, the Fed could decide to buy Treasuries in smaller steps, calibrated to the economic outlook at each meeting.
Forecasting firm Macroeconomic Advisors estimates each $100 billion in asset buys could lower the yield on the 10-year Treasury note by 0.03 percentage point. That is a marginal move that could go unnoticed, though if Fed buying helped nudge up the inflation rate it could get a bit more of a bang for its buck on real rates. Even a small amount of easing is not to be sneezed at, says Michael Feroli, chief U.S. economist at JPMorgan Chase.
What all of these experts seem to have failed to see is that they have gone too far. They have stalled the economic engine and all the maneuvering in the world they do in the bond markets will not do anything to jump start the economy. They are talking about tightening non-financial credit. We have nearly zero lending to small business now, how tight can get it get beyond zero.
The FACTS are that consumer credit card debt continues to shrink and consider this from Reuters.
WASHINGTON | Fri Sep 17, 2010 1:45pm EDT, – U.S. household wealth fell by $1.5 trillion in the second quarter, according to Federal Reserve data on Friday that showed the strain a slow-paced recovery and high unemployment are putting on Americans.
Household net worth fell to $53.5 trillion, well below the $64.2 trillion it had reached at the end of 2007 when the recession officially began, according to the central bank’s quarterly flow of funds report. Declines in the value of financial assets — especially in stocks and mutual funds — accounted for much of the decline in second-quarter net worth. Stocks alone were down $1.9 trillion to $14.9 trillion, more than offsetting small gains in other areas like state and local government retirement funds.
Consumers pared debt at a seasonally adjusted annual rate of 2.3 percent, the ninth consecutive quarter in which they did so. Home mortgage debt fell at an annual rate of 2-1/4 percent after a 4-1/4 percent drop in the first three months this year. During the financial crisis that wracked the country from 2007 to 2009, trillions of dollars in housing and financial market wealth was wiped out and heavy household and financial sector indebtedness was exposed.
The government has stepped in with increased spending and stimulus programs to try to spur recovery but the unemployment rate in August edged up to 9.6 percent and housing markets are still in distress.
Federal government debt expanded during the second quarter at a hefty 24.4 percent annual rate after a 20.5 percent increase in the first quarter. By contrast, state and local government debt shrank 1.3 percent during the second quarter. THE actual figure of the US’ national debt is much higher than the official sum of $US13.4 trillion ($14.3 trillion) given by the Congressional Budget Office, according to analysts cited on Sunday by the New York Post.
“The Government is lying about the amount of debt. It is engaging in Enron accounting,” said Laurence Kotlikoff, an economist at Boston University and co-author of The Coming Generational Storm: What You Need to Know about America’s Economic Future.
“The problem is we’re seeing an explosion in spending,” added Andrew Moylan, director of government affairs for the National Taxpayers Union. In 1980, the debt – the accumulated red ink incurred by the Federal Government – was $US909 billion. This represented some 33 per cent of gross domestic product, according to the Congressional Budget Office (CBO).
Thirty years later, based on this year’s second-quarter numbers, the CBO said the debt was $US13.4 trillion, or 92 per cent of GDP. The CBO estimates the debt will be at $US16.5 trillion in two years, or 100.6 per cent of GDP. But these numbers are incomplete.
They do not count off-budget obligations such as required spending for Social Security and Medicare, whose programs represent a balloon payment for the Government as more Americans retire and collect benefits. In the case of Social Security, beginning in 2016, the US Government will be paying out more than it is collecting in taxes.
Mr Kotlikoff and Mr Moylan agree US national debt is much more than the official $US13.4 trillion number, but they disagree over how to add up the exact number. Mr Kotlikoff says the debt is actually $US200 trillion. Mr Moylan says the number is likely about $US60 trillion. That is close to the figure quoted by David Walker, the US Comptroller General from 1998 to 2008.
Business debt excluding financial companies was up a slim 0.1 percent following a 0.5 percent rise in the first quarter. Data issued on Thursday by the U.S. Census Bureau similarly underlined the extent to which the financial crisis and ensuing recession has hurt household incomes.
But to me the most worrisome “Bad Number” is related to the impact of “hollow pension plans” on the growing population of baby boomers hitting retirement age. Consider this from MARY WILLIAMS WALSH, published: September 17, 2010.
Earlier this year, Illinois said it had found a way to save billions of dollars. It would slash the pensions of workers it had not yet hired. The real-world savings would not materialize for decades, of course, but thanks to an actuarial trick, the state could start counting the savings this year and use it to help balance its budget.
Gov. Pat Quinn of Illinois approved a plan in April that seemed to help balance the budget, but it may imperil the pension fund. Actuaries, including some who serve on the profession’s governing boards, got wind of what Illinois was doing and began to look more closely. Many thought Illinois was using an unorthodox maneuver to starve its pension fund of billions of dollars, while papering over a widening gap between what it owed and how much it had. Alarmed, they began looking for a way to discourage Illinois’s method before other states could adopt it.
They are too late. The maneuver, and techniques that have similar effects, are already in use in Rhode Island, Texas, Ohio, Arkansas and a number of other places, allowing those states to harvest savings today by imposing cuts on workers in the future.
Texas saved millions of dollars this year after raising its retirement age for future hires and barring them from counting unused sick leave in their pensions. More savings will appear in coming years. Rhode Island also raised its retirement age for future retirees last year, after being told it could save $90 million in the first year alone.
Actuaries have been using the method for years, it turns out, but nobody noticed, in part because official documents usually describe it in language few can understand. The technique is fairly innocuous in normal times, allowing governments to smooth out their labor costs over many years. But it becomes much riskier when pension funds have big shortfalls, when they need several decades to pay down their losses and when they are cutting benefits for future workers — precisely the conditions that exist today.
Dubious pension numbers in Illinois are not easily shrugged off after a warning shot fired by the Securities and Exchange Commission in August. The S.E.C. accused New Jersey of securities fraud, saying the state had manipulated its pension numbers to look like a better credit risk, while selling some $26 billion worth of bonds. The S.E.C. had never before taken action against a state. Now the commission is flexing its muscles, unleashing a team of specialized enforcement officials to look for more misleading public pension numbers. The same type of conditions exist in large corporate pension funds as well.
It is the compilation of these facts that has me continuing to be concerned that we really haven’t seen the worst of this depression. It’s election time and we are hearing all kinds of outrageous promises and assessments of where we are in relation to the economy. However, to me, the facts I have just laid here say it all. The contraction continues at the street level, unemployment rose in August, and we haven’t even discussed the potential global impacts such as the potential collapse of sovereign funds such as Greece, Spain or Portugal that could occur at any moment.
To me, staying the course, tightening business credit and mortgages at this point, along with no further stimulus is exactly the wrong thing to do. But alas, it is the course so I would suggest you get ready to hunker down…. oh say about NOW.