Archive for February, 2010

AIG Continues To Haemorrhage Bucket Loads of Cash

February 28th, 2010 Comments off

Just over a year ago, simultaneously with the implosion of Lehman Brothers, the U.S. Federal Reserve and Treasury Department decided not to let American International Group  fail, no matter the cost. That bill has been heavy; $182.3 billion of U.S. taxpayers money has been injected into AIG to ensure its survival amidst massive losses on its London-based credit default swap business. Each and every citizen of the United States has been billed more than $600 to cover AIG’s losses. In effect, the Fed and U.S. Treasury have used the zombie-like subsidized life support of AIG as a pass-though, transferring billions of dollars to investment and foreign banks. The largest recipient of American taxpayers money transferred through AIG was Goldman Sachs, which received a $12.9 billion payoff, which seems to have gone straight into bonuses for its senior executives. Was it mere coincidence that Goldman Sachs CEO Lloyd Blankfein sat in on a meeting with Ben Bernanke and Hank Paulson to decide on the scope of the taxpayer’s subsidy to AIG?

The Fed and Treasury, which decided on their own to effect a bailout of AIG without any input or sanction from Congress and the American people, have assured us that their infallible judgement can be relied on to make the correct decision for the U.S. taxpayers. Well, that “infallible” decision-making has left the American people tied ball and chain to a private corporate entity that is still losing vast amounts of money. AIG has recently reported its Q4 results: a loss of $8.9 billion. This may be a sign of more red ink to come, as the global economic recovery falters amid mounting concern over high unemployment and sovereign debt crises. AIG apparently is not done as a costly financial liability for the citizens of the United States, despite the fact that not a single one of them had the opportunity to vote in favor of this hideously expensive experiment in corporate socialism.

Will the UK Follow Greece in Facing a Severe Debt Crisis?

February 24th, 2010 Comments off

The British pound sank like a stone as the Governor of the Bank of England, Mervyn King, issued a grim warning during testimony before the UK Parliament’s Treasury Select Committee. The central fiscal problem is the £178 billion annual deficit incurred by Gordon Brown’s government in the midst of the global economic crisis.

Mervyn King indicated that the Bank of England will have to continue with quantitative easing in the face of the massive government deficits, sending negative signals to investors as to the stability of the nation’s currency. He warned that both the current government, and a likely new government to succeed Brown after the next British general election, must send a clear message to the markets that they have a credible plan to significantly reduce the nation’s fiscal deficits.

I think the current breed of politicians, in the UK and elsewhere, haven’t a clue how to address the massive, unsustainable deficits that plague virtually every major and advanced economy. Which means that it is only a matter of time before the UK, and then the US, follow in the footsteps of Greece down the road of national insolvency.

A Keynesian Leap Off the Financial Cliff

February 21st, 2010 Comments off

A highly tangible outcome of the global economic crisis and its first stage, the so-called Great Recession, has been the deleveraging underway by households and businesses throughout major advanced economies. In the United States and United Kingdom, consumers who boosted consumption on the basis of easy credit as opposed to higher disposable incomes are now tightening their belts and battening down the hatches. The predictable result has been a decline in aggregate demand. This is where the neo-Keynesians enter the fray, preaching the gospel of mega-deficit spending by governments.

The classical economic theory as developed by John Maynard Keynes holds that in times of severe economic contraction in the private economy, it is permissible for the sovereign to go into debt and increase spending to compensate for the falloff in consumer and other private sector expenditures. The rationale is that this short-term increase in the public debt will retard the rise in unemployment, limit the impact and duration of the economic recession and in the long run lead to overall better economic performance, with limited effect on the ratio of public debt to GDP. Though advocates and opponents can offer differing views on the historical validity of Keynes and his counter-cyclical concepts of sovereign  intervention in the economy, there is no doubt that his theory is intellectually cogent and based on a serious analysis of economic problems, particularly in regards to the Great Depression of the 1930s. However, is the current wave of unprecedented sovereign indebtedness equally cogent? If John Maynard Keynes were still alive, he would likely take issue with the massive tidal wave of red ink being unleashed by politicians as their antidote to the global economic crisis.

Though John Maynard Keynes is portrayed as a deficit-loving interventionist, in reality he was not. What is left out of the description of his theory in regards to counter-cyclical fiscal policy is that Keynes also believed that in times of relative prosperity sovereigns should create budget surpluses. He belief was that booms and busts were an integral characteristic of modern capitalism, and that  the accumulation of reserves during times of plenty would enable governments to engage in temporary deficit spending to combat a severe recession, without creating the long-term danger of exploding national debt to GDP ratios. This is an aspect of Keynes’s views on fiscal policy that has been conveniently forgotten by the modern interpreters of Keynesian economics.

Since World War II, the U.S. has seldom run balanced budgets. If generally accepted accounting principles were applied to official U.S. federal government budget reports, which require taking into account future liabilities for Social Security and Medicare, then during this period the United States has always run large fiscal deficits, even during times of relative economic prosperity. What this means in reality is that the conditions laid out by John Maynard Keynes for allowing a sovereign to engage in deficit spending during a recession, namely building budget surpluses during periods of economic expansion, have never been adhered to.

During the Great Depression,  the U.S. government did engage in substantial deficit spending within the framework of the New Deal, but with a ratio to GDP far lower than what is currently occurring on President Obama’s watch. This fiscal policy was engaged in with a cumulative national debt to GDP ratio nowhere near the current level, and with a large base of domestic savers prepared to buy U.S. government debt, in contrast with the present day reliance on foreign buyers of U.S. Treasury Bills.

If John Maynard Keynes were alive today, I suspect he would be horrified at the manner in which his economic theories have been distorted, and the likely outcome of such fiscal profligacy.

USA Faces Grave Debt and Deficit Crisis, Warns President of Kansas City Federal Reserve

February 17th, 2010 Comments off

Thomas Hoenig, President of the Federal Reserve Bank of Kansas City, has issued a stark warning regarding the ballooning U.S. federal government annual deficit and cumulative national debt. Hoenig told  the Pew-Peterson Commission on Budget Reform that massive deficits being  projected by the Obama administration would endanger the Fed’s ability to fulfill its mandate of maintaining stable economic growth and price stability.

“Without pre-emptive action, the U.S. risks its next crisis,” stated Hoenig. What this senior Federal Reserve official is saying, on the public record, is that the current U.S. fiscal policies are unsustainable, and unless halted and reversed in short order, will precipitate a hyper-inflationary depression.

Paul Revere has spoken. But who is listening? Certainly not the economic policymakers in Washington DC, who believe only small countries like Greece can face national insolvency. Sooner then they can imagine, they will receive an education  which unfortunately will cost their countrymen dear.

Eurozone Sovereign Debt Crisis a Growing Global Danger

February 14th, 2010 Comments off

In my book, “Global Economic Forecast 2010-2015: Recession Into Depression,” I project that a growing sovereign fiscal crisis will transform the current Great Recession into a synchronized global depression. The events currently transpiring in the Eurozone are early indicators that my forecast is on track.
At the recent summit of European Union leaders in Brussels, which included the head of the European Central Bank, the PR spin doctors released what can best be described as ambiguity in the form of a communiqué, offering unspecified assurances that the Eurozone’s major actors will not permit Greece to succumb to its current sovereign debt crisis. The hope was that the markets would buy this assurance, thus preventing a further slide in the euro.

Not only are the markets, at least terms of the euro’s relative value, not being reassured by the happy talk that emanated out of Brussels; upon his return to Athens, Greek Prime Minister George Papandreou  was harshly critical at the lukewarm words of EU reassurance. He said, “in the battle against the impressions and the psychology of the market, it was at the very least timid, ” in referring to the EU communiqué.

The bottom line is that without a massive bailout by the big guns in the Eurozone, in particular Germany and France, Greece faces fiscal collapse, which in turn will prove destructive to the whole Eurozone. However, if indeed Greece is bailed out, a host of other insolvent EU members using the euro will be lining up for their bailouts. Even ignoring the feelings of the German and French taxpayers (which is not politically tenable) there simply is not fiscal capacity within the Eurozone to backstop the other potential sovereign basket cases.

I foresee no possible scenario that allows for a soft landing from this escalating sovereign fiscal and debt crisis.

Greek Debt Crisis May Be Canary in the Coal Mine For Eurozone

February 10th, 2010 Comments off

Greece is in the midst of its worst fiscal crisis since the end of World War II, with a budget deficit now officially stated as being 12.7% of GDP. However, given the past shenanigans when it comes to government bookkeeping in Athens, it would not surprise many if the true deficit ratio to GDP is even higher than currently admitted. The Greek government cannot employ monetary policy as a means to inflate down the value of its national debt, as it is part of the Eurozone. The primary policy option it has left is reducing its budget to sustainable levels, but that would require sacrifices on the part of the population that would likely lead to social disintegration on a massive scale. Already, mass waves of strikes are being planned, in protest at austerity measures being promised by Greek politicians.

Athens is hoping and praying that the wealthier and less profligate members of the Eurozone will bailout Greece, reducing the level of austerity that will be imposed on Greek citizens. Greek political circles clearly hope that the systemic risk posed to the entire European monetary union by its fiscal crisis will compel German and French politicians in particular to swallow the risk of moral hazard, and have their taxpayers bailout Greece. The news that the President of the European Central Bank, Jean Claude Trichet, will be attending an emergency European summit on February 11 in Brussels sent stock markets around the globe soaring, in the hope that Germany and France will bailout Greece. It should not surprise anyone at this stage in the global economic crisis that the best news for investors seems to be taxpayer funded bailouts, as opposed to real economic progress.

The speculation is that the ECB and key Eurozone actors will capitulate, and sacrifice their concern over moral hazard for the sake of preserving the euro. However, this is at best short-term thinking. The fiscal catastrophe Greece finds itself in today, and which Iceland has been experiencing for more than a year, threatens many other European countries. Spain, Portugal, Italy and Ireland, not to mention Eastern Europe and the UK, are all wrestling with exploding levels of sovereign debt. Even if the Eurozone political leaders and the ECB cobble together a bailout of Greece, they simply lack the financial resources to bailout the next wave of European sovereigns that will feel the wrath of a savage fiscal crisis that is actually being made worse by the cumulative taxpayer liabilities that are now expanding towards infinity.

Only In America: U.S. Unemployment Rate “Drops” While Economy Still Sheds Jobs

February 7th, 2010 Comments off

In the bizarre world of quantum mechanics, there is a specific sub-atomic particle that can mathematically be in two places simultaneously. In the even more bizarre world inhabited by the U.S. Bureau of Labor Statistics, it is possible for the American economy to still lose jobs while at the same time the unemployment rate declines. American ingenuity strikes again!

The BLS’s recent report on U.S. unemployment statistics revealed that officially, the American economy lost 20,000 jobs in January. Considering that most economists predicted a small gain in jobs, this is obviously a worse than expected result. Yet, despite the jobs losses, the BLS is also reporting that the official U.S. unemployment rate dropped from 10%  to “only” 9.7%. How did the creative minds at BLS shrink the unemployment rate even though fewer Americans were working in January in comparison with December? Through cunning statistical manipulation. Apparently, someone decided on high that it was not politically expedient to maintain an official U.S. jobless rate in double digits, so despite the continuing job losses, a way was found to report a reduction in the unemployment rate.

What is even more remarkable about this BLS imbroglio is the reaction of mainstream American media. Virtually every significant news source in the United States is heralding the BLS manufactured “drop” in the rate of unemployment as a signpost on the road to economic recovery, and a first rate achievement, demonstrating true progress towards resolving America’s unemployment catastrophe. It seems that there is a collective will in America to drink the Kool-Aid of wishful thinking. One gets the impression that the Democratic Party has borrowed the old faith-based ideology from the Republicans, maintaining that belief that things are indeed getting better will somehow transform celestial thinking into terrestrial reality.

Hidden amidst the opacity of BLS statistics was the admission that the U.S. government had vastly undercounted the number of job losses in 2009, supposedly by more than 600,000. This stunning admission reveals the unreliability of the Bureau of Labor Statistics to accurately gauge jobs destruction in the United States brought on  by the global financial and economic crisis. What we have in lieu of statistical objectivity is PR spin and metaphysical interpretations.

With contradictory statistics pouring out of the BLS, undermining the efficacy of any official analysis of America’s dim employment reality, I offer a more useful gauge of what is actually transpiring. With 70% of America’s economic output derived from consumption, what is actually happening to the financial capacity of American consumers to actively participate in the American economy?  Taking into account  not only high unemployment, but replacement jobs that are part-time or compensated at lower salaries, it is clear that the collective income of American consumers continues to deteriorate. Anecdotal evidence based on plummeting federal and state tax revenues are a clear marker of this calamitous decline in the purchasing power of American consumers.  Unfortunately, not even the creative statisticians and alchemists at the Bureau of Labor Statistics can spin this dim reality into positive signs that America’s economic renaissance is just around the corner.

Interview on Global Economic Trends and Forecast

February 5th, 2010 Comments off

I was recently interviewed on the Internet radio show Spin Cycle, featured on the Contrary Investors Café. The show’s hosts, Andy Sutton and Duane Chandler, questioned me on issues raised in my book, “Global Economic Forecast 2010-2015: Recession Into Depression.” We had a lively discussion on current and future economic and financial trends, including the rapidly deteriorating sovereign fiscal imbalance afflicting many major economies, especially that of the United States, as well as the ramifications of peak oil on inflation.

Readers of my blog can hear the interview in full by going to this website’s homepage and clicking on “Interview with Sheldon Filger.”

U.S. Government Spending is Out of Control: America Enters the Fiscal Twilight Zone

February 2nd, 2010 Comments off

Ten years ago, the Clinton administration submitted to Congress a proposed federal government budget of $1.9 trillion. Now, the Obama administration has released  a proposed budget for the upcoming fiscal year. It is a whopper: more than $3.8 trillion. As inflation has been low over the past decade, if official U.S. government statistics are to be believed, the great majority of this doubling  in federal spending over the past decade has been actual increases in real terms.

More disturbing than this explosion in federal outlays has been the record deficit that is being projected, following on the heels of previous record deficits. The red ink being forecast for FY 2011 is an eye-popping  $1.56 trillion. Yet, President Barack Obama claims that this is a first step towards deficit reduction.
I beg to differ with the president. Far from being a move towards fiscal responsibility, this massive spending fest, with a projected deficit that is the equivalent of more than three quarters of total federal government spending a mere ten years ago, is the clearest indication yet that U.S. government spending is out of control, and has entered the fiscal twilight zone. As I project in my new book, “Global Economic Forecast 2010-2015: Recession Into Depression,” this dangerous path is unsustainable. The ultimate consequences will be frightful.