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America Not Near To Solving Its Debt Problems
Bob
Chapman
International Forecaster Weekly
Monday, February 8th, 2010
As we have been forecasting for the last two years, the second
wave of mortgage defaults and foreclosures will hit the economy
this year. Not only will we have failure in prime loans and
option-arm loans, but we are faced with a new crop of subprime
and ALT-A loans put into motion by Fannie Mae, Freddie Mac,
Ginnie Mae and FHA. In addition, we find it of great interest
that the FHA is changing the rules to purchase homes. That,
of course, means less homes will be purchased.
The incidence of unemployment may be lessening, but it isn’t
going away. Those of you who keep your ear to the ground know
that real unemployment is 22.5% and in cities like Detroit it
is somewhere near 45 to 50 percent. This is the result of free
trade, globalization, offshoring and outsourcing. No city in
America has been deprived of their livelihood more than Detroit.
Yet, this is only the beginning. If allowed to continue 30 percent
more of our jobs will be allowed to leave America, making our
country an economic basket case over the next 20 years. The
$25 billion that our federal government is about to loan to
the states will help keep unemployment paying out and save some
40 states from going into bankruptcy. That will keep some Americans
going but not for long.
Foreigners are buying less and less US dollar denominated assets,
specifically Treasury and Agency bonds. As an example, Russia
is buying Canadian dollar denominated assets. We ask how does
the US fund its debt and its growing debt? The administration
is planning for some sort of exchange of retirement funds for
a government guaranteed annuity. That is so they can fund their
enormous debt domestically as Japan has done for almost 20 years.
Who would want to have a government guaranteed annuity from
a bankrupt nation? It should also be noted that these retirement
plans are still vastly under funded. What will happen if the
Dow again revisits 6,600 and these funds’ assets again
fall 40 percent? The collateral behind any annuity would be
almost cut in half. We will have to see what the government
comes up with but any kind of voluntary plan would in time become
a mandatory plan. The funds may well be funneled to insurance
companies, so they can take part of the action, but they will
be buying Treasuries and Agencies with those funds, you can
take that to the bank. One of the rumors floating about is that
a new 5 percent tax will be foisted upon what is left of American
taxpayers, in the form of forced savings, which would be in
the form of an annuity. The need for funds to run the government
is advancing by more than 10 percent a year, as government becomes
bigger and bigger. We see no abatement in Marxist, socialist
or fascists in government in their desire to spend to make government
ever bigger.
The public is howling for blood, particularly from banking
and Wall Street, and rightly so, but the main culprit was the
Fed and in third place lies our government. In populist pose
our President wants to tax Wall Street and banking for looting
our economy. We might remind our President that these are the
very people who financially put him in office. There is also
talk emanating from the Oval Office of breaking up the banks,
so that the too big to fail problem will be solved. This is
the result of trillions of bailout funds for banks, which then
post outsized mega profits, and little or nothing to assist
the taxpayer. Investigations are going on to find out what caused
the collapse of the system, but Americans believe they will
go nowhere. The main brokerages and banks that caused most of
the problems are the owners of the FED, the 12 regional Fed
banks and the legacy, money center banks in NYC. How far do
you have to investigate to find that out? Billions are being
paid out to banks’ top employees, money they made with
the assistance of a taxpayer bailout. The public believes it
is unfair and they are right. As an example, Lloyd Blankfein,
CEO of Goldman Sachs, who says, “He is doing God’s
work,” will receive $100 million as the unemployment lines
lengthen day by day. The President in his new budget says he
will spend $100 billion creating jobs for Americans and $25
billion will be loaned to 40 states, so they can pay extended
unemployment benefits. The gap between the haves and have-nots
grows wider.
As a result of the changing of the guard in who rules Wall
Street and Washington, JP Morgan Chase has again surged to the
forefront and with them former Chairman of the Federal Reserve,
Paul Volcker. This time his role will be more subdued then it
was in the early 1980s. He cannot advocate a purging of the
system as he did in the early 80s, because the financial system
has been allowed to go too far. Any such purge would take the
system down; something of that nature should have been done
three years ago. Mr. Volcker wants banks to go back to taking
deposits, making loans and to return to 8 to 10 to one leverage,
not 40 to 70 to one. He believes banks should not have proprietary
trading operations and that they should be transferred into
unregulated hedge funds. That would solve very little. The change
would be cosmetic. Then again isn’t that what government,
Wall Street and banking are all about – subterfuge?
The administration and Congress refuse to deal with ever growing
debt in spite of its decaying affect on our financial structure
and banks and many other corporations are carrying two sets
of books and refuse to deal with toxic assets. The Fed has purchased
$900 billion of these toxic assets and they won’t tell
us what they paid and from who they bought them from. Monetary
growth continues and much of it sits on bank balance sheets
having borrowed it from the Fed, where much of it lies gaining
interest that is being paid by the taxpayer. Those are costs
that are deducted from any profit the Fed makes that is returned
to the Treasury. In addition, overall there is no transparency
and the gambling by Wall Street and banking goes on unabated
just as it has in the past - the sort of high velocity risk
that caused all these problems in the first place. Much of what
they do is off balance sheet. The next three years will see
lenders buried in falling commercial real estate, so the death
dance won’t end for some time to come.
The banks and hybrid brokerage-banks are all involved in flash
trading, which is more appropriately known as front running.
They continue to engage in naked shorting and the SEC stands
by and does nothing. This gambling and criminal activity is
funded by the Fed via very cheap loans. Then there is their
business and relationship with totally unregulated hedge funds.
The money center legacy banks are growing not shrinking and
now control more than 70 percent of global banking assets. You
add this all up and you find you have a financial oligarchy
that is gaining in dominance not shrinking, as Wall Street would
have you believe. While this transpires our President and Congress
have doubled the federal deficit. The previous two administrations
and the current one have taken debt from almost nothing to $12.3
trillion, which will be $14.3 trillion by December. Even the
Fed’s debt has risen to $2.2 trillion having engorged
themselves on bonds from Agencies, Treasuries and with toxic
waste. The Fed is lying about their holdings; they purchased
80 percent of last year’s Treasury debt. What they did
was stuff billions in purchases under other investors –
household, which is ludicrous.
While the Fed went overboard lending, extending credit and
buying paper, the government saw spending grow 13 percent, not
counting $200 billion for wars as tax revenues fell 14%. Household
debt only improved slightly but is still 165% of disposable
income. That is as unsustainable as is the public making up
69.5% of GDP.
America is nowhere near solving its debt problems and in fact
the situation is worsening. That means in the second half of
the year we could see a drop in the US credit rating. This problem
is true worldwide. US debt to GDP could be 85% by the end of
the year with Germany at 80% and Ireland 83%. As you can see
many nations have debt problems. All nations have and are continuing
to debase their currencies versus gold, which will range higher
as continued debauchery takes place.
The number of mortgage applications in the U.S. rose 21 percent
last week to the highest level in more than a month as refinancing
rebounded.
The Mortgage Bankers Association’s index rose to 620.7
in the week ended Jan. 29 from 513 in the prior week. The group’s
refinancing gauge increased 26 percent, while the purchase gauge
rose 10 percent.
The gain in purchase applications may be the first sign a renewed
and expanded government tax credit is stirring demand after
sales dropped late last year on expectations the incentive would
expire. The market, faced with mounting foreclosures and 10
percent unemployment, may need continued government assistance
to sustain gains in the second half of 2010.
“Both mortgage rates and house prices remain low, but
the market lacks a catalyst for a vigorous recovery,”
Michael Larson, an analyst at Weiss Research in Jupiter, Florida,
said before the report. “We’re muddling through.”
The mortgage bankers group’s refinancing gauge increased
to 2,854.8 from 2,260.4 the prior week. The purchase index rose
to 237.8 from 215.6.
The average rate on a 30-year fixed loan fell to 5.01 percent
from 5.02 percent the prior week, the group said. The rate reached
4.61 percent at the end of March, the lowest since the group’s
records began in 1990.
At the current 30-year rate, monthly borrowing costs for each
$100,000 of a loan would be $537.43, or about $17 less than
a year ago, when the rate was 5.29 percent.
Mohamed A. El-Erian, whose firm runs the world’s biggest
mutual fund, said the largest stock market decline in 11 months
may worsen amid persistent U.S. joblessness and economic growth
that trails analysts’ forecasts.
Investors have wrongly priced in an “orderly” withdrawal
of stimulus measures, a rebound in bank lending and coordinated
government policy to restore growth, the chief executive officer
of Pacific Investment Management Co. wrote in a Bloomberg News
column. That means Wall Street projections for gains in 2010
may prove incorrect and prices will slump, he said.
“Investors may well find that January’s global
equity sell-off was just a precursor to a disappointing year
for several asset classes,” El-Erian, 51, wrote. “The
global financial crisis has undermined growth and job creation;
it has clogged many of the pipes that allocate funds to productive
uses; and it has rapidly taken public debt and the budget deficit
to worrisome levels.”
A “safe harbor” agreement that protects the underlying
assets of securities held by failed banks from being seized
by U.S. regulators may be kept in place beyond March, a Federal
Deposit Insurance Corp. official said.
FDIC officials had wanted to exempt all assets securitized
through March 31 to ensure a smooth transition to a new accounting
rule that rattled credit markets because of the prospect of
more aggressive asset seizures.
“I think it’s safe to say that we will need to
extend the March 31 safe harbor period,” Michael Krimminger,
a special policy adviser to FDIC Chairman Sheila Bair, said
yesterday at the American Securitization Forum’s annual
conference near Washington.
New accounting rules sparked concern among bond buyers and
rating firms that the FDIC would be able to tap the pools of
debt underlying credit-card securities to protect its deposit
insurance fund after banks fail. The concern halted sales of
such bonds in October and early November after issuance totaled
$10.7 billion in September, according to data compiled by Bloomberg.
Policy makers are seeking to transform the almost $4 trillion
U.S. market for securitizations not created by government-supported
entities. Risky lending enabled by asset- backed bonds and investor
losses on debt including subprime- mortgage securities contributed
to a collapse in the world’s economies.
The US economy appears to be positioning itself to make the
vital turn to positive job growth by beating market expectation
only losing 22,000 positions in January while forecasts had
called for 35,000 persons to join the unemployment roles. ??
January's figures mark the lowest job destruction recorded since
February 2008 when the recession pushed the job market into
negative numbers as well as the eleventh straight month of a
slowdown in the number of jobs shed.??December's reading was
also revised upwardly to -69,000 from the originally reported
-84,000.
Employers announced 71,482 planned job cuts last month, up
59 percent from December and the most monthly job cuts since
August, according to the report from Challenger, Gray &
Christmas, Inc, a global outplacement consultancy.
"The increase in January is not necessarily a sign of
a recession relapse. It is not uncommon to see a surge in job-cut
announcements to begin the year," said John Challenger,
chief executive of Challenger, Gray & Christmas, in a statement.
"Companies are making adjustments based on the previous
year's results and the outlook for the year ahead. The beginning
of the year is particularly rough on retail workers, as these
employers enter one of the slower sales periods of the year,"
he said.
The January job cuts were up from 45,094 in December and marked
the first increase since July. December had marked the fewest
job cuts in 24 months.
Still, the planned layoffs remain well below year-ago levels,
when planned job cuts hit 241,749 in January 2009, the peak
of downsizing activity in the recession.
Technology wages in Silicon Valley, home to Google Inc. and
Intel Corp., have declined almost 14 percent since 2000, a sign
that the region has yet to recover fully from the dot-com bust.
The average compensation for technology workers was $103,850
in 2008, down from $120,064 in 2000, with the biggest drops
caused by the falling value of stock-based pay, the U.S. Bureau
of Labor Statistics said today in a report. Average wages increased
to $105,500 in the first half of 2009.
The Internet bust triggered job cuts across Silicon Valley,
with semiconductor makers, Internet startups and telecommunications
companies taking the largest losses. Silicon Valley, which runs
from San Francisco to San Jose, will probably be slow to recover
from the latest recession, said Amar Mann, an economist with
the Bureau of Labor Statistics.
“We agree with more of a U shape, a gradual rise,”
Mann said today at a press conference. Declines in venture capital
investment resulted in slow technology-job growth in past economic
cycles, a pattern that the current recovery will likely follow,
he said.
Silicon Valley has lost 134,000 technology jobs since 2000,
including 30,000 during the nine months ended in June. The six-
county region now has about 410,000 technology jobs, Mann said.
The area lost jobs from 2000 to 2004, then added positions before
the latest recession, he said. Technology accounts for about
one in seven local jobs. http://www.dailyjobcuts.com/
"When the people find they can vote themselves
money, that will herald the end of the republic."
- Fall Of The Republic - Buy
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