If Donald Trump Scares You, You Should See a Depression

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Guest post by Lee Presser.

America’s fiscal year is October 1 to September 30.  With two month left in FY16, the U.S. Treasury has already paid creditors $380,925,428,211.67 in interest costs.  (That’s $381 Billion)  http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

The average interest rate was just over 2%http://www.treasurydirect.gov/govt/rates/pd/avg/2016/2016_07.htm

 It is expected that the last two month’s of this fiscal year, interest costs will increase another $45 to $66 Billion.  The total FY16 interest cost may be between $426 and $447 Billion. 

 In FY11, the Treasury paid creditors a record $454,393,280,417.03.  (That’s $454 Billion) 

 With the debt at $19.4 Trillion (that’s 19,400 billions of dollars) what do you suppose the interest costs to the Treasury will be when the annual interest rate returns to normal?  (Normal would be 4% to 6%)

 In fiscal year 2015, the federal budget was $3.8 trillion.  Of that amount only $1.11 Trillion was spent on what budgeters call discretionary items; food and agriculture, transportation, social security & unemployment & labor, science, energy & environment, international affairs, housing & community, veteran’s benefits, Medicare & health, education, government, and military. 

 The other $2.69 Trillion was spent on interest and what budgeters call mandatory items; spending on programs that are required by existing law.  Medicare and Social Security are the two largest mandatory spending programs.  They are about 40 percent of the federal budget.  Agriculture, Defense, Education, and Veterans Affairs, also require mandatory spending. 

 As interest costs increase, either discretionary spending decreases or the annual deficit increases.  Mandatory spending is unaffected unless Congress changes the law.  Those mandatory checks always go out. 

 So, when interest goes from $426 Billion per year to $600 Billion per year, $174 Billion in programs that serve you and your neighbors must be cut.  Or, Congress can increase the money supply to continue paying for the programs, which, as you would expect, will lower the purchasing power of your paycheck. 

 Of course, we could vote in new leadership and change the trajectory of government expenditures.  But, for most of you, that’s way too scary. 

Quick Note on Market

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I was up early this morning sifting through the market stories.

  • Asia: crash
  • Middle East: crash
  • Europe: crash
  • USA: set to open

There’s good news in all this loss. First, stocks were overpriced. At some point, they will bottom out and it will be time to start buying. Second, the Golden Age of the Central Banker seems to be over. And that is very good news.

Central Bankers

The best financial blogger alive, Ben Hunt of Epsilon Theory fame, coined the phrase “Golden Age of the Central Banker.” His notes, combining investing with game theory, will make you smarter.

Since 2008, the world has believed that central bankers run the economy. That’s why the S&P 500 has been tracking the Fed balance sheet almost perfectly. It’s why markets ignore business fundamentals, good or bad, and move up or down exclusively in anticipation or reality of what the Fed will do.

In short, people have lost faith in central bankers, as SocGen admits. And that’s good news.

There are many reasons for the economy’s lackluster recovery from 2008, but expectations that the Fed would do all the work for us was key. As long as The Bernanke or Yellen could snap their fingers and levitate my 401k, who cares? As long as CEOs could borrow money at zero interest and buy back their company’s stock, boosting their own compensation, why do actual work?

As a result of easy money, US corporations have taken on record debt while capital investment in plant, people, and equipment is at a record low. Think about that for a moment. We’ve learned since childhood that, if you must borrow money, borrow only things that hold their value or increase your marketability. We borrow for homes and eduction and the tools we need to do our jobs. We don’t borrow for consumption products and fun.

But that’s exactly what US corporations have been doing since the great recession: borrowing spending money for fun.

The Cloudy Crystal Ball

I have no idea where the  market goes today. Yellen could step in and buy S&P 500 shares directly. The Dow could end the day at 18,000 or 14,000. I don’t know. Some say the S&P needs to drop about 50 percent to re-correlate with commodities. (See chart)

But the Wizard’s been exposed. If the Central Banks intervene to prop up markets, people will realize that all’s not well with the economy. If the Fed stays on the sideline (where it belongs), people will know that it’s time to do the work ourselves instead of waiting for the Fed to shovel money our way. But there will be pain for a while.

The crash of 2008 shifted bad habits from Wall Street banks to Treasury and the Fed. Those bad habits will eventually cost us. And that payback could be starting.

The great news: we can fix this. We know how. We’ve done it before.

Insane: Stocks Markets Rally On Economic Disasters

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Eurozone’s economy is basically in recession.

Walmart lowered expectations. Again.

The world is teetering on the edge of World War.

The US is launching Iraq War 3.0: Mission Accomplished Accomplished.

Germany’s economy is flat, and Italy and France are getting worse.

Risk is high.

Corporate debt is staggering.

The Fed’s balance sheet is a sea of monetized debt.

The central banks have nothing left to fix another crash.

And the stock markets are rocketing to record highs because of all this news.

What the hell is wrong with people?


More good news for stocks and bad news for the rest of us since I printed this at 6:30 a.m.:

Jobless claims jumped by 21,000—the most in 3 months.

Import prices dropped 0.2 percent as European deflation comes to America.

And Putin calls for end of US Dollar as world’s reserve currency.

Perhaps the stock traders are sobering up, though, as US futures have gone from skyrocketing to flat.


Are We Watching The Central Bank Era End?

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Are they going to peg all the banks? Why, they could buy ground and build a new Mississippi cheaper. They are pegging Bulletin Tow-head now. It won’t do any good. If the river has got a mortgage on that island, it will foreclose, sure, pegs or no pegs.

— Mark Twain quoting Uncle Mumford, Life on the Mississippi

When I last checked the Internets last night, markets were booming in Asia, and US futures were soaring. All in response Turkey’s central bank, which raised its interest rate benchmark to north of 12 percent. Unheard of territory.

From ZeroHedge,  on 01/28/2014 18:09 -0500

Judging by the reaction from SocGen and JPY crosses (and thus global equity markets), the Turkish Central Bank’s decision – to tighten aka ubertaper – has solved all the tapering, tantruming, turmoiling problems in markets. JPY crosses instantly exploded higher, automatically lifting US (Dow +60) and Japanese (NKY +110) stock futures markets before they closed.

The rate hike was meant to attract capital to into Turkey. With interest rates on “safe” investments–government bonds–remaining at historic lows, an offer 12 percent would seem like a windfall for people sitting on globs of cash (borrowed from governments).

But today’s bull market didn’t last. Again, from ZeroHedge.com:

The Carnage Continues In Asia As China PMI Confirms Contraction Deepening

Submitted by Tyler Durden on 01/29/2014 – 20:50

Sharp change in just over 24 hours, wouldn’t you say?

No one seems to know why the markets so quickly reversed, but continued bad news (often spun as proof of recover) from earnings and government reports didn’t help. The “experts” have told us for months that there is no stock bubble. The Dow’s going to 20,000 and beyond. Get used to it!! Get your butts to Costco, and buy, baby, buy!

On November 24, one of the greatest minds alive–Ben Hunt–noted that two mega-bears threw in the towel and joined the “markets will rise forever” camp.

I started this note with quotes from two prominently bearish money managers – Jeremy Grantham and Hugh Hendry – both of whom are throwing in the towel on the upward trajectory of the market in the face of inexorable government bond-buying. Their change of heart reflects (finally and begrudgingly) the overwhelmingly dominant Narrative of Central Bank Omnipotence, that for better or worse it is central bank policy (particularly the Fed’s QE policy) that determines market outcomes.

Meanwhile, I’ve been warning: when the experts agree on the future, bet the other way.

Experts Tamed the Mississippi 130 Years Ago, Don’cha Know

In Life on the Mississippi, Mark Twain takes readers up and down the Mississippi. He takes us on this trip as a historian, then as a young man in love with the river, and, finally, as an old man on a nostalgia trip to New Orleans. 

We learn that between Twain’s last trip as a pilot on the Mississippi and the time of his later voyage, the Army Corps of Engineers has tried to tame the mighty river. But an old pilot, Uncle Mumford, offers Twain his opinion. The engineers are smart fellows, Mumford admits; smarter than he. And West Point taught them more about the river than Mumford could comprehend.

But the engineers didn’t live on the river the way Mumford had. They didn’t know the river. The learned about the river.

Mumford’s warning, “If the river has got a mortgage on that island, it will foreclose, sure,” foreshadowed the floods of 1993.  That’s what inspired me to read the book, and that quote was the main learning I took from it. Warning of foreclosure stuck with me.

Question Expert Consensus

When all the experts agree, expect the opposite.

From a rooftop smoking lounge at work, we could see the price at QuikTrip. Every day in 2008, the price went up. Every day, we expected to see it fall. Finally, we all gave up because, according to the USAToday headline of June 12, 2008: “Oil Experts Contend High Energy Prices Are Here To Stay.

But the experts were wrong. And shortly after those experts reached consensus, the market reversed. By the time trees were turning in the fall, that QuikTrip sign dropped under $1.50.

This chart shows gasoline prices in the US at key points during 2008. Remember, the experts reached consensus in June.

US Gasoline Prices 2008

Here’s the chronology of US gasoline prices of 2008 from Treehugger.com:

July 7, 2008—Crude oil prices settled-in at a new record of $147 per barrel. The U.S. average price for regular gasoline climbs to an all-time high of $4.11 per gallon. Road trip style vacations are put on hold for many summer travelers.

Aug. 5, 2008—Oil prices fall below $120 a barrel. Treehuggers search for the good within the escalating gas prices.

Sept. 15, 2008—The barrel continues to drop below $100 a barrel for the first time in six months. The idea of a serious financial industry recession is discussed as the market literally begins to melt down!

Oct. 16, 2008—Oil prices fall below $70 a barrel, which is less than half of its July peak. Signs of $1.99 a gallon gas brings celebration to the masses. Some consumers begin to talk about dragging out their gas guzzling SUV’s and Winnebago’s for the first time in months.

Nov. 3, 2008—U.S. Gas prices drop to $1.72 a gallon. Some gas stations even roll out a $.99 cent promotional deal. Treehuggers question whether the sudden drop is as good as most consumers seem to think it is.

Dec. 17, 2008—OPEC removes 2.2 million barrels from its daily production. Crude oil collapses to $40 a barrel, becoming the lowest price in almost 4 years.

I Am NOT An Expert And This Isn’t Investment Advice

I own four stocks that I bought on my own through Sharebuilder. Three trade at less than a penny a share, and I paid at least $10 a share for each.

But I do pay attention to expert consensus. And I have looked into the phenomenon of experts being wrong. It’s not a difficult field to study, because it happens often.

In the present case, the experts are central bank planners. They want to control the world’s economy. They believe their expertness allows them manipulate the economy any way they want.

But they can’t. No more than the Army Corps of Engineers could keep the Mississippi from foreclosing on its mortgage. No more than oil experts could keep the price of gasoline rising. No more than the Soviets could command a robust and growing economy with toilet paper for all.

Yes, power allows central planners to control aspects of the economy for periods of time. But the forces underlying the economy don’t stop moving. Pressure doesn’t stop building. It’s simply contained, like the water of a giant river, or the cap on a super volcano.

When outside forces that the planners can’t control or didn’t know about strike the planned economy, the dam bursts, the cap ruptures, the economy crashes.

I’m not sure we’re witnessing the rupturing of the central banks’ plan. This could be just a temporary blip.

Even if this isn’t “the big one,” though, the big one’s coming.

The central bankers have run up a massive mortgage that all the people alive on earth cannot repay in a lifetime.  No central planner in history ever kept control forever, and no pegs ever kept a river in its banks for good.

Richard Florida Has the Relationship Between Home Ownership and Growth All Wrong

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In a column intended to attract readers, not to promote hard economics, Rotman University economist Richard Florida declares that home ownership is terrible for the US Economy.


The problem is, like many economists, Florida’s understanding of home ownership is 180 degrees ass-backwards.  Florida thinks that home ownership is supposed to cause economic growth.

Instead of leading to economic development, higher rates of homeownership today are associated with lower levels of it.

No, professor.  Home ownership is the reward for economic growth in healthy systems.  In the 1990s and 2000s, however, government mandates more or less forced people to buy homes and forced banks to lend to anyone.  That drove up the home ownership percentage without the organic economic growth to justify it.

Once we unwind from 20 years of bad Washington policy, home ownership will once again signal a health economy and stable neighborhoods.

Now if you’d help us get government and crony big bankers out of the way, we’ll restore housing equilibrium and a vibrant economy in no time.


Read more: http://www.theatlanticcities.com/jobs-and-economy/2012/06/homeownership-means-little-economic-growth/1379/#ixzz1ypPvKLFS