Explain This Mr. Krugman

Another Monday about done. Summer Mondays are rough!

As an aside, it seems like Animal Planet here as of late. In the last two weeks I have seen in my back woods near the yard:
-Rabbits
-Fisher Cat
-White Tail Deer
-Wild Turkeys (about 6 of them in a group!)
-Marten
-Red Fox
-Red Tail Hawk
Maybe they can smell the Big Steel Keg when it's cooking?

Housing Issues are Still Not Going Away
One of the most deeply held beliefs of policy makers is that real estate was suffering from a liquidity shortage and that stop gap measures could support prices for a time until things got back to "normal". This has gone on a lot longer than they must have expected and looks at this point to be a multi year (decade?) phenomena. Nice effort though guys!

All kinds of stories today about hosing, and I will do a linkfest so I can focus on the main section.

Via Zero Hedge:
Spain Goes For Broke In Sweeping Toxic Crap Under The Rug For Second Time In As Many Years
You are really going to have to read this one, and try not to cry. Just unreal. I am so sure the Euro bank stress tests will cover all this, yuppers!

Calculated Risk takes a look at the HAMPer results and finds them unimpressive. Another waste of time, money, and effort:
HAMP Data Shows over 150,000 Trials Cancelled in May
I know, you are shocked.

More form CR, a guest post forecasts some problems for home sales next month:
Lawler: Home Sales in May; a Look at the Data
If the author is correct, this is going to miss expectations by a ton.

For comic relief, enjoy the NY FED's comic strip on how they handle inflation:
The Story of Inflation
No word yet on the release of the long awaited follow up work called "The Story of Failure".

Explain This Mr. Krugman
It has been a while since I have pointed out a Paul Krugman piece, and I think I even agreed with him a few times over the past few months! Miracles do happen! Tonight it seems I am back where I always end up with Krugman, in total opposition to anything he says.

One of the issues I often have with policy makers or mainstream economists is that they never have to really answer for real world data. All their exercises are theoretical and abstract. It can be frustrating.

Tonight I have a perfect example of this very thing.

Paul Krugman writes in a NY Times Op-Ed the following:

Now and Later
Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?
Very hard, if the current state of political debate is any indication. All around the world, politicians seem determined to do the reverse. They’re eager to shortchange the economy when it needs help, even as they balk at dealing with long-run budget problems.

But maybe a clear explanation of the issues can change some minds. So let’s talk about the long and the short of budget deficits. I’ll focus on the U.S. position, but a similar story can be told for other nations.

At the moment, as you may have noticed, the U.S. government is running a large budget deficit. Much of this deficit, however, is the result of the ongoing economic crisis, which has depressed revenues and required extraordinary expenditures to rescue the financial system. As the crisis abates, things will improve. The Congressional Budget Office, in its analysis of President Obama’s budget proposals, predicts that economic recovery will reduce the annual budget deficit from about 10 percent of G.D.P. this year to about 4 percent of G.D.P. in 2014.
Unfortunately, that’s not enough. Even if the government’s annual borrowing were to stabilize at 4 percent of G.D.P., its total debt would continue to grow faster than its revenues. Furthermore, the budget office predicts that after bottoming out in 2014, the deficit will start rising again, largely because of rising health care costs.

So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.

If you just woke up from a coma this maybe all sounds reasonable and a good idea.

So let's dismiss the idea that budget shortfalls could be fixed by higher taxes, social security changes, or health care savings for a minute. While all may well be possibilities, it is not needed for this discussion.

What Mr. Krugman, as well as all the other Keynesian sort, leave out is historical fact. I get the idea, spend to cushion a bad economy and then pull back when the economy is good. Fair enough. What should have been included in the OP-Ed were these charts:
CBO's Estimate of Budget Deficit 1980-2020

Now I do not want to give too much weight to way off future projections, but at a minimum we have a solid 30 years of data here that shows a grand total of 4 YEARS where the US did not run a deficit. 4 out of 30. Call me crazy but I am pretty sure (correct me if I am wrong) that we have not had a "severe economic crisis" for 30 years. Well, I mean we have, but not the way it is defined technically!

A longer term view:
Federal Budget Deficit 1930-2010

Again I find it hard to take Mr. Krugman seriously when the enormous weight of history shows he is as wrong as can be. Can you see the surpluses? You may have to squint. My point is that no one serious could write that Op-Ed and then present those two graphs and expect anyone to not think them a nut job. However, this is what passes today for mainstream economic thought, facts need not apply.

So how is it possible that the US can run these deficits for all time and nothing seems to come of it? It is a great question and there are numerous facets (reserve currency, idea of higher taxes in the future, leprechauns) to the final answer. I like to dumb things down because that is how I best understand them (insert joke here!) and so here goes:

In order for some entity (bond market, other countries, aliens) to call the US out on this fantasy land game of cheating someone has to have something to gain from the other side of that bet. So the US cannot really pay back their debt? Who cares? Refinance it and keep rolling it over and everyone gains. What would be the point of blowing the US bond market up? None at all.

It is a strange phenomena at work here. Unless a major world event occurs where there is a scramble for hard assets and hard money the US will continue to get away with this stuff. I actually have a fleshed out theory on this big picture wise, but I do not want to be called a conspiracy nut. If interested, email me and I will serve it up!

Of course, maybe at some point more than 100 people here in the US will figure this out and desire some real reform. I would not hold my breathe.

Have a good night.

Don't Break Your Arm Patting Yourself on the Back

Hot and humid here, almost 90 degrees. I love the heat, so no complaints from me! The heat forces you to put on the car air conditioner, or risk sticking to the seats. I hate running the air conditioner because it makes the car much less responsive due to the power drain to run the A/C compressor. Oh well.

Gold and Silver Observations
I know you all have been waiting for yet another precious metal themed section, so here one comes!

China Pushing Silver Investment?
Economic Disconnect is a big fan of silver. Silver has on its resume the following (all data is from Wikipedia, so you know it is true):

- highest electrical conductivity of all metals
- Among metals, pure silver has the highest thermal conductivity
- the highest optical reflectivity
- Silver also has the lowest contact resistance of any metal

Now those are some fine qualities!

Silver was once the money standard, and even China was set on a "silver standard" for some time. Seems things run full circle as this video from the blog The Prudent Investor shows. Key point summary:
-Official Chinese television announced silver bullion now open for public investment
-500 gram, 1, 2 and 5 kilo bars are offered
-Chinese news aware of the gold/silver ration, making them about 100 times smarter than CNBC

So is this a big deal? I would say it could be, how is that for finality?

I think back to Treasury head Geithners talk a while back in China when he said their US treasury holdings were "safe" and the laughter it garnered. If given a chance to put their own money to work, Chinese nationals may indeed look to silver as an investment. This is even more plausible when you consider how much China, as a country, has money tied up in US debt.

A step back may provide some clarity. Assume just 30% of the average retail investors decided tomorrow that gold and/or silver should make up just 1% of their portfolios, this would consume nearly all the gold and silver available and cause a huge price run up. Precious metal investing is a small time operation related to public investment, so any expansion can make a big difference. Hopefully there will be some way to monitor how this program fares.

Gold is Not Readily Fungible
The next tale come form Jesse's Cafe, and it is a good find.

While checking out a video presentation by Max Keiser, a startling revelation about German gold reserves comes up. The entire video is worth a look, especially the section where Keiser is at the German Bundesbank on the day Bear Stearns collapsed. You can clearly see the fear and panic from the bank officials he does talk with:

Jesse offers the following commentary which as usual hits the bulls eye:

"The most fascinating thing that I learned is that all the gold 'in Germany' is in New York." Around 7:25 in the tape.

This is of particular interest because it has been repeatedly denied by Bundesbank in the past, when questioned about the rumoured gold swaps the the US Exchange Stabilization Fund for 1,700 tons of gold, now being held at West Point, NY with the designation "custodial gold."

Has the Bundesbank, like the Bank of England, sold (or lent if you will) half of its national gold reserves? Interesting.

The other side of this rumour is that Bundesbank desperately wishes a 400 ton IMF gold sale to help it recover the 1,700 tonnes of gold which it has lent out to the bullion banks, who subsequently sold it into the market.

Why does it matter? It matters because of the lack of transparency of various Central Banks with the size and timing of their gold sales, and its impact on the markets. Its never really the initial act, it is the subsequent cover up and dissembling that brings down careers and governments.

As I had written above, gold is not held by a large base. Central banks are the main movers of bullion (though the gold ETF is making moves up the ladder all the time). One may wonder why in the world, if fiat money is so perfect and amazing, that the central banks do not just dump all their gold. I think that question leads to a few answers and truths one would do well to keep in mind (I will not answer for you).

Gold expands as a base around 0-2% per year. The outstanding derivative notional bets on gold far outweigh what exists above ground. The central banks have long played with gold sales to target gold prices (why bother, gold is useless remember?) and the possibility that the German gold may be "on the lend" even while the metal itself sits in New York is one of those real world examples of how notional instruments get far ahead of reality. Of course you can always print more money, issue more bonds, or write more stock to cover such things. You cannot invent or print gold.

Don't Break Your Arm Patting Yourself on the Back
I think the current euphoria rankles me as it does because of the reliance on "confidence" measures to effect behavior. When an entire marketplace is built on perception and illusion it can be easier than one would believe to "make it so just by saying so".

In a NY Times op-ed today, my favorite Keynesian economist, Paul Krugman, begins a victory lap for big government spending which seems a bit premature (excerpts):

Averting the Worst
So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.

Just to be clear: the economic situation remains terrible, indeed worse than almost anyone thought possible not long ago. The nation has lost 6.7 million jobs since the recession began. Once you take into account the need to find employment for a growing working-age population, we’re probably around nine million jobs short of where we should be...

A few months ago the possibility of falling into the abyss seemed all too real. The financial panic of late 2008 was as severe, in some ways, as the banking panic of the early 1930s, and for a while key economic indicators — world trade, world industrial production, even stock prices — were falling as fast as or faster than they did in 1929-30.

But in the 1930s the trend lines just kept heading down. This time, the plunge appears to be ending after just one terrible year.

So what saved us from a full replay of the Great Depression? The answer, almost surely, lies in the very different role played by government...

The point is that this time, unlike in the 1930s, the government didn’t take a hands-off attitude while much of the banking system collapsed. And that’s another reason we’re not living through Great Depression II.

Last and probably least, but by no means trivial, have been the deliberate efforts of the government to pump up the economy. From the beginning, I argued that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan — a number that will grow over time — and that the stimulus has played a significant role in pulling the economy out of its free fall.

All in all, then, the government has played a crucial stabilizing role in this economic crisis. Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.

And aren’t you glad that right now the government is being run by people who don’t hate government?...

I’m still very worried about the economy. There’s still, I fear, a substantial chance that unemployment will remain high for a very long time. But we appear to have averted the worst: utter catastrophe no longer seems likely.

And Big Government, run by people who understand its virtues, is the reason why.

The thing to remember about Paul Krugman is that he is a political hack first, and an economist second. The cheerleading for big government in all of his writings colors his view.

The second thing to remember is that Mr. Krugman never asks nor answers any questions that have relevance. After considering the events of the 1930's Depression and how it compares to today's calamity does Krugman ask:
-Why the "hands off" approach during the Great Depression? In this I think there is a monster hole in Depression thinking. The US Federal Reserve could not just print money (we were on the gold standard) like they do today. Also, and this is key, public opinion was such at the time that making believe by having fake spending would not have worked as nobody would have bought it! I know, in the old days folks were a mistrusting sort and had more than a modicum of understanding.
-If the big government solution has been so effective, why does Krugman desire yet another stimulus? What's the matter Paul, maybe not so sure about this recovery?

The always great blog, Owner Earnings, does not post as regularly as they once did. When a new post is up, however, you would be well advised to check it out. From the most recent post the author compiles a list of "things that the government has done to prevent (delay) a depression" that is a must read review:

A list of things that the government has done to prevent (delay) a depression:
Banned short selling.

Eliminated mark to market.

Allowed Vikram Pandit to send a memo saying (lying?) that things were going well back in March. The rally started shortly after.

Reduced interest rates to 0%.

Extended unemployment benefits.

Running a $1 trillion budget deficit.

Reduced finance rates for banks via the Discount Window.

Bailed out Fannie Mae

Bailed out Feddie Mac

Bailed out AIG

Bailed out GM, though temporarily

Bailed out Chrysler, though temporarily

FDIC has spent billions closing down insolvent banks

Credit of $8,000 first time home buyers credit.

Credit of $4,500 via Cash for clunkers.

Credit of $600 via a rebate check.

Guaranteed $250,000 bank account balances via FDIC, up from $100,000

Guaranteed financial bonds

Guaranteed money market accounts

Guaranteed Bear Stearns assets

Bought preferred stock in financial companies

Bought agency bonds

Bought Treasuries

Expanding to the next logical step:

A list of things that the government has yet to do, but probably will do:
Bail out State governments (Bond guarantee?)

Bail out Local governments (Bond guarantee?)

Guarantee health care (which I would approve of)

Raise taxes (The republicans will try to force democrats to admit it before the 2010 election. The democrats will have to admit it once the 2010 election is over.)

Significant devaluation of the dollar. This is already playing out compared to the emerging markets, but will begin to play out more against the Euro and the Yen.

Significant reduction in Social Security and/or Medicare benefits.

Allow companies and or officials to either avoid telling the truth and/or flat out lie.

Manipulate or stop providing data that shows how bad things are. Transparency anyone?

I agree with Paul Krugman here, to make good on that entire list it would take Gigantic Government, not just a big one!

Adding to this list will soon be the commercial real estate bailout which may run another 1 trillion in losses (maybe more).

While Krugman, the president, and many others are trying to take a victory lap and proclaim the wisdom of their actions, I would ask you to review the above lists again. The entire financial system in the US is now government guaranteed. While there has been talk of "exit strategies" as of late, there really is no way out now. Every item above will soon become a ward of the state and carry a Fannie Mae like "implicit, but explicit" seal of approval. There will be no exit. If the government disagrees with me, I would ask them to stop any one of the above programs and see what happens. I triple dog dare you!

A visual:


Have a good night.

Everything I Wrote Last Night Was Wrong

The comments section last night was a great place to learn about knives and tolls you may need if the end of the world ever comes. As for myself I favor swords, nothing quite like a real folded steel clay treated samurai katana to use for personal protection.

The Government Should (and will) Be in the Telling You What to Buy Business
I have to hand it to homebuilders. They constructed millions of homes that were not needed all over the country and helped to cause the biggest mortgage bust in history and yet they still have the balls to scream for help. I am sure they will get it. I mean, the government should be able to MAKE YOU BUY THINGS THAT ARE NEEDED TO HELP THE ECONOMY, right? What could make more sense? From Housing Wire:

Builder Confidence Hits New Low; NAHB Urges Buyer Stimulus
By DIANA GOLOBAY
January 21, 2009
Home builder confidence across the U.S. slumped to a new record low of 8, according to a monthly survey released Wednesday by the National Association of Home Builders. The housing market index, measuring builder perceptions of current single-family home sales and sales expectations for the next six months, is based on a scale of 100 where any number over 50 indicates more home builders perceive sales conditions as good than poor. An all-time low of 8 — a downward slip of a single point from December’s survey — indicates sales conditions are worse than they have been in more than 20 years, since the NAHB began the survey.
“Clearly, conditions in the nation’s housing market aren’t getting any better, and they aren’t going to get any better until the federal government takes substantial action to encourage qualified buyers to get back in the market,” said NAHB chairman Sandy Dunn, a W. Va.-based home builder. “The Obama Administration and the new Congress have a tremendous opportunity and responsibility to enact legislation that can spur home buyer demand and jump-start the national economy.”

The government should force people into the housing market. It is so American I cannot think there will be much opposition. Now if Washington could just force banks to buy up all those mortgage backed securities that are marked for the taxpayers instead, we might get someplace.

TARP Funds Used for Bonuses Now Buy Bank Stocks
All the hot news was that the bankiing CEO's of BAc and JPM were buying the company stock with their own money. In an era when the incoming treasury secretary cannot even pay his own taxes due to funny games of paperwork, how sure a thing is it that Dimon and Lewis are using their own money? Why not commit some of the TARP bonus money from 2008 to the cause? We may never know.

If the banks are such great buys, why do Dimon and Lewis not commit 100% of their net worth to the stocks? Whatever. This was a flashy confidence boosting trick and wall street went nuts over it. One word of caution for those two gentlemen. From a chronological recounting of the Great Depression:

March 1931Over 50% of the industrial companies on the NYSE were using excess cash to buy their own stock at low 1930 and 1931 prices. Some retired it and some kept it as treasury stock for future use in mergers or for other purposes. This reduction in the number of floating shares, similar in an opposite direction to the flood of new issues floated during the 1929 boom, makes the decline in share prices even more glaring. It also demonstrates that even many business insiders still did not understand the nature of this Great Depression.

What is Old is New Again
My favorite economist Paul Krugman had a strange departure from his normal Keynesian clowning and lefty bias writing to make a great comparison of the three major presidential keynote speeches. It seems the same old lines make the rounds no matter who is president. From Krugman's blog:
January 21, 2009, 8:58 am

Shared responsibility
Barack Obama, 2009:
What is required of us now is a new era of responsibility - a recognition, on the part of every American, that we have duties to ourselves, our nation, and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.

George W. Bush, 2000:
A hundred years from now, this must not be remembered as an age rich in possessions and poor in ideals.
Instead, we must usher in an era of responsibility.

Bill Clinton, 1993:
We must do what America does best: offer more opportunity to all and demand responsibility from all.
It is time to break the bad habit of expecting something for nothing, from our government or from each other. Let us all take more responsibility, not only for ourselves and our families but for our communities and our country.

Priceless!

Everything I Wrote Last Night Was Wrong
What a difference one 12 hour span can make. I now take back everything I wrote last night. The banks are just fine, even better than fine. They will not need any more dilutive help nor will require nationalization. The bulk of the losses are now over and things are looking up.

The dollar is a rocket ship built on solid fundamentals and should recapture its old highs withing 2 weeks. The British pound is unfairly targeted and will stage a rebound the likes of which the world has never seen.

Russia and the Arab states have fully planned for oil at $20 a barrel, so this $35 a barrel price is all gravy. There should be no problems with those economies. At all.

The consumer spending numbers were obviously wrong, and business spending will take up the slack anyways, just look at the IBM and Apple earnings. Retail should be strong going forward.

I guess I was wrong about everything. If you get caught up in the daily silly moves of the markets you would feel that way anyway. As long as these stupid "everything is over" rallies happen we push out the real process of bottoming out even further. What a sick waste of time to trade the same 8% of the indexes over and over again with no direction.

As I have written that fundamentally sound markets that have good underpinnings do not pinwheel to the tune of 4% on a daily basis. Banking stocks themselves have moved over 20% for two days in a row. Nobody knows anything (myself included) and everything you see from the government interventions to the wild swings in the indices is proof positive a guessing game is going on. And I thought the markets hated "uncertainty"?

Have a good night.