Ken Nelson

The most dangerous and powerful people you never heard of

That question is essentially what Michael Pento is talking about in his article, Bernanke Out of Bullets but not Bombs.

But what are bombs?  Well, bullets are the traditional way the Fed exerts influence – controlling the cost of its money. But what does it do when that money is free?

Basically, it finds new routes to get it to you, stepping around the pesky banks that are taking the free money but not loaning it out due to profit and reserve goals (and common sense).  They could, in fact, just print up a few trillion and then cut out the middle man:

The Fed could buy a trillion-plus dollars worth of S&P 500 stocks. Consumers that sold stock to the Fed would receive funds that didn’t previously exist. M1 money supply would boom as demand deposits surged

or since things seemed kind of good in the go-go housing days, maybe they could:

guarantee ‘no down payment’ loans of any amount to any borrower, with a promise never to foreclose or seek compensation in the result of default. By making home purchases risk-free, such a policy would surely re-energize the housing sector.

I’m sure they are getting huge political pressure to do just these sort of things. And they have signaled strongly that they do not want… cue ominous music… ‘deflation”.

So… do you prepare for deflation, or inflation. Inflation, of the hyper-kind, seems likely.

I just wish we didn’t have a Federal Reserve, private money seems much more secure.

The latest from Merle Hazard America’s blue grassin’ist economist!

After watching this I want to get my mandolin out and chop a bit.

 
Bigger than any bank, but you didn’t know it was a bank

You may think British Petroleum is an oil company. And it is, sort of. What it really is is a finance company. It leverages its huge asset base (cash, cash flow, oil rights, physical assets) to get cheap credit that it then loans out to others at a higher price.

You didn’t know this?  Well, that is understandable. Do you think Obama and his crew know it? Or care?  They should. By trying to take down BP for their own political gain they could mess up  a precariously balanced, extremely leveraged,  and highly interconnected international finance system where BP is a major player in the 615 TRILLION dollar company to company finance market (also known as OTC or over-the-counter).

OTC is where the real work of global business happens. It is where money is loaned, risk managed, and profits made.

If trillions in BP backed financial instruments, such as derivatives, credit synthetic options, credit default swaps, and other global arbitrage instruments, fail the result could be a deleveraging and liquidity crisis that makes the Lehman Brothers event that precipitated billions in government bailouts look like a hot spring versus Krakatau.

For more on the risk BP financials threads pose, read this helpful article, Sultans of Swap, by Gordon Long.

You can ignore or take to heart his predictions. I find it useful to really know what BP is and why we need to tread carefully in what we impose on it.  This isn’t to say that companies can grow too big to be accountable, but with the good of large companies come plenty of risks. We can’t really have one without the other.

What I suggest is that Obama’s political skin isn’t worth, to the rest of us anyway, another, bigger, 2008 deleveraging event.

We can really only go one of two ways on these things. No controls, but make sure the players are playing with their money (not ours). OR do not permit these types of markets at all.  Government half regulating, 1/4 crony, and 1/4 witless cannot keep up with the pace and complexity of these markets that in many ways welcome regulation as just another thing they can arbitrage.

I favor letting them do their own thing, with their own money. They will learn to not dig holes they can’t climb out of if we aren’t there to bail them out.

Where corrupt fools go to work

I don’t want to raise taxes on those that already pay taxes. So where would I cut? I’ll start with a list of unneeded Government departments. Unless otherwise noted, these would be cut ENTIRELY:

Dept of Defense         -  $708 billion – I’d cut about $200 billion out. For a start.
Dept of HHHS             -  $81 billion
Dept of Transportation -  $79 billion  – I’d cut to level needed for air travel
Dept of Education   – $67 billion,  $100 billion in stimulus money
Dept of Housing      – $48 billion
Dept of Justice       – $29 billion – cut all outside funding of any other agencies
Dept of Energy       – $28 billion
Dept of Agriculture -  $26 billion
Dept of Labor         – $14 billion
Dept of Treasury    -  $14 billion  – I’d cut to 1/3rd present budget
Dept of Interior      – $12  billion (transfer lands to states)
Dept of Commerce – $9   billion
EPA                     – $10 billion  (I’d cut to less than a billion)
NASA                   – 19 billion    (I’d cut it all – sorry)
National Intelligence Program – undisclosed. Well, they would disclose it to me and then I’d cut it brutally. This is what happens to failures.
US Army Corp of Engineers – $4.9 billion  – I’d stop all new projects, only maintenance and correct fixes of what has already been built.

This represents all the Departments of the government. I’ve bravely cut stuff we don’t need, BUT I’ve ONY saved about $718 billion dollars.  Where is the rest of the money? We are $1.5 trillion in debt annually.

Well the department budgets do not include these spending items:

Medicare                           – $453 billion
Medicaid                           – $164 billion
Other Mandatory Programs – $571 billion

”Other”, it turns out, is things like Food Stamps, Unemployment, Supplemental Security for blind, Student Loans, and government retirement benefits (civilian and military)

I need another $700 billion in cuts to balance my budget. But… I’ll fudge a bit and suggest that my awesome discipline is causing the economy to grow as investors welcome my austerity with their money.  And some of my other costs, like interest and retirement costs are dropping because I’m borrowing less and have less employees to fund retirements for.

So I’ll set my goal at $500 billion.  Medicare isn’t going to go down, not a lick. Even if I contain costs it will grow based on demographics.

Medicaid.. I’ll cut that entirely and let the states handle it. $164 billion
I’ll then change Civil Service retirement benefits, get rid of Federal Food stamps, stop any kind of federal welfare spending and I’m at about $200 billion.

So I’m at $364 of me needed $500 billion.

And I’ll let economic grown eat that up, or maybe just inflate a bit cause I can.

Final notes. The above isn’t going to happen through a political process. But I hope I’ve shown just how hopeless it is to think that RAISING taxes would help either. Taxes would have to double or higher, and the resulting economic collapse wouldn’t fund much government.

What will happen, however, is that we won’t have the departments above, nor the mandatory spending above, because there won’t be a United States above. Oh there will be a US, but it will be a 1970’s Argentina. A land of rampant inflation, little job prospects, and cow towing to the whim of other countries.

Put another way… the piper will be paid.

My approach is difficult, sure, and it puts a lot on the states to make hard decisions too. But life ain’t easy. And I’d rather 50 local choices, some great, some bad, than one crappy national one. Grow up states – Sugar Uncle ain’t printing it no more!

"Magnificent! Compared to war all other forms of human endeavor shrink to insignificance.
God help me, I do love it so!"
- General George Patton Jr

25% of the anemic 2nd quarter growth of 1.4% was caused by defense procurement or consumption (i.e. war):

Alas, even the GWOT has to end sometime. Or does it?  Will we have a permanent military-war-on-terror complex, like we have left over from the Cold War?  That seems likely.

Visual Metaphor

One of six Americans get government aid. And that doesn’t count the people getting federal aid in other ways, like banks, car companies, pork recipients, stimulus boondoggles, and education funding.

I favor helping people that need help but can’t help themselves. I’m talking basic food, shelter, clothing type needs. And that should come first from local, then state systems. Beyond that, you should be on your own.  And the Feds should have no role. If a state can’t handle it, then a region can band together.

Federal takings are not invested properly currently, and haven’t been for a century.  Terrible (negative) returns and missed opportunity costs on these false “investments” harms economic prospects for all of us but especially those near the bottom.   Everybody would be better off if the Federal government limited their role substantially.

But due to greed, stupidity, flaws (16th amendment) in our Constitution, and also the evil desires of some, the Federal role will not shrink, but will has, is, and will grow . So we will suffer until it all collapses.  And that will happen faster than you think.  America is on shaky ground now.

It would be far better for housing and the economy to announce "There will be no further housing tax credits."

Calculated Risk blog

I agree. Once subsidies are expected you’d be stupid to buy when they aren’t in effect.  At a minimum not only would you feel stupid you would be competing against subsidized purchases when you sold your unsubsidized house later.  Even worse are targeted subsidies aimed at people who can’t afford mortgages – been there done that.

Screwed up courtesy Ronald Reagan’s 1986 Amnesty

Ebay, Adobe, and EA are expanding in Utah not California.

I’d like a 2nd home in downtown San Diego, but my wife keeps putting the kibosh on it with quotations like “are you crazy?”, “I don’t want their hooks in us” and “CA scares me”.

I reply that life isn’t ALL about money; that temperature, humidity, and excellent ocean kayaking are ALSO part of it, but I have not convinced her yet.

Anyway… back to businesses leaving the state… Those that can will. Those that can’t will be leeched empty.  Others will cheat like mad and move to underground/barter systems to avoid the heavy hand of corrupt unionist government.

My advice… if you can get out, do it soon, as I suspect they will put up a toll booth on the east bound lanes of the ways out of the state.

HatTip: Peter K.

That is what old people say every day as they laugh on the way to bank with young people’s future wealth:

A 65-year-old female can expect a net gain of more than twice that amount; she can expect $163,000 more in benefits than she will pay in taxes

versus

A 20-year-old female can expect to pay $92,000 more in taxes than she will receive in transfer benefits over her lifetime. The future looks more than three times as bleak for her male cohort, who can expect to pay $312,000 more in taxes than he will ever receive in benefits.

Ah… but will young people bother to earn it?  After all, they, at least, have their youth.

My story is a bit different. I get the financial pain of the 20 year old male, but none of the benefits of somebody just 15 years older than me.

On “is there a government bond bubble”…

A one-time jump in prices of this magnitude would leave the nominal price of outstanding nominal bonds unchanged, but reduce the real price (the purchasing power of nominal bonds) by 58%. 

…

And it doesn’t take much of an increase in expected future inflation to do a very big number on the prices of long-term bonds.

Opinions differ in this Economist online debate… but none of them are encouraging.

Yesterday, I said I didn’t feel good about the stock market and I was “in all cash”. I gave macro-economic/government policy reasons, but left out that in my view the current relatively strong earnings of public companies reflected more on cutting costs and reducing investment than on actually doing anything long term to make more money. In other words, earnings are up but for how long and at what price?

Here is a little data along those lines, courtesy EconomicPicData, that confirms my view:

In summary… expect earnings to be under pressure in the not too distant future unless there is surprise outsized rebound in the economy.

Yep. I concur. Eventually, you’ve cut to the bone. Eventually, as I’ve found, you notice bad service at restaurants and decide to just say home.

Alas, investment in software and equipment is at a 50 year low. Pent up demand? This blogger hopes so… (-:

Via http://econompicdata.blogspot.com/

We charge for this               but provide this

Intel CEO says it costs $1 BILLION extra to put a $4 billion dollar factory in the U.S. :

The rub: Ninety percent of that additional cost of a $4 billion factory is not labor but the cost to comply with taxes and regulations that other nations don’t impose.

In return for that extra money he then gets an ongoing fight with hostile state and federal governments, higher wage and labor costs, a zillion lawyers, and the 2nd highest corporate income tax rate in the world.

Gosh.. wonder where the jobs go?

Upside down: I’m just not feeling like hiring right now honey

Small business isn’t hiring because they feel, or are, poor due to the housing collapse.

That isn’t why I’m not hiring, but I can certainly see it in small businesses that are locally oriented.

Worthless                        Heading for worthless                The new currency?

Some folks think Dow 5000 is coming. I tend to agree. I hope I’m wrong, but can’t see anything positive on which I can justify improving my view.  In the same article a guy from J.P. Morgan (stock is down!) claims there are opportunities in stocks and that a double dip recession is “unlikely”. I do agree there are specific opportunities in stocks, but that isn’t what most investors do. Lacking time or expertise to gamble on specific stocks, they use the stock market, via index funds, as a proxy for the state of American business – and that proxy is sagging.

Lots of things work against stock – having to hold them a year for favorable tax treatment (who wants to do that in this volatile time?)  Plus the general “once burned” sense of those who lost 40% of their 401K in recent years. There is no new 20 trillion dollars to replace what fell, so how, exactly, is the market to grow? This seems pretty obvious. Sure, specific winners, whoever the Google is of 2011, will do well, but in general I see long term malaise in the market.

Government causes most of the obstacles to improving our economy. By channeling so much of our productivity into non-producing activities, they act as an anchor slowing down everything and sucking away initiative. They also spawn uncertainty because of all the really silly ideas they are forcing on business.

What would perk up the economy?  Immediate action to remove obstacles with a certain long term trend to speedily chip away at the size, scope, and consumption of government.

If that happens, the market will rebound quickly. If not, we face a lost decade or longer.

So cash it is. That at least holds the value for a bit, but with inflation looming and gold already way high,  what to put it into?  No idea. Nowhere looks good.

P.S. Don’t forget the Hindenburg Omen…