krogias

One of the problems with out of control government spending is the way it affects the behavior of government itself. Like any other junkie, the government convinces itself it needs "just one more" fix and will do anything to get it. Again like a junkie, the government will prostitute itself and steal from friends and family to keep the drug supply coming. We see a glaring example of the later when governments simply grab private property in order to pay off their own debts. We have already seen the precedent for pensions being seized by government. Just last week in Hungary the government grabbed $14 billion in private assets. Over the weekend, the Irish government decided to take 15 billion Euros from the future pensions of its citizens to give to the banks. Now France is taking 36 billion Euros from the pension fund to keep its bloated and unsustainable welfare state afloat for just a little while longer. People need to understand that the United States is not immu...

During the current economic crisis, most of the major countries have tried to spend their way out - either with government programs funded with new debt or by forcing debt directly into the private economy through guarantees, regulations and action by quasi-government bodies. We discussed the implications for China in Command and Control and for the US in The Federal Funhouse . These initiatives were based on Keynesian economic theory - that government should make up for any shortfall in private demand by spending (likely incurring deficits) sufficient to stabilize aggregate demand. This is a temporary band aid at best and the governments and central banks were hoping to buy time and convince everyone that things were OK so they should go out and spend. This was doomed to fail as prior private demand was based on nearly universal lending at suicidal risk levels. One of the key objectives of Financial Jenga was to document the extent of the madness in credit. Enough people have s...

It seems quite popular in these days of crisis for certain commentators to compare struggling individual states within the USA to the troubled Eurozone PIIGS (Portugal, Ireland, Italy, Greece and Spain). ECB President and Apologist in Chief for the Euro Jean-Claude Trichet (and boy isn't that a bunch of Capitalized Words strung together) is a prime example. A couple of weeks ago in a speech about the Greek Financial Crisis his remarks were summarized by Business Week : He [ Trichet ] also played down the importance of Greece's economy on the euro region, which he said represents less than 3 percent of the bloc's GDP, especially when compared with the size of a U.S. state such as California. A number of news outlets and blogger have echoed these sentiments so it behooves us to examine the validity of the comparison. On the pure surface level, Trichet is correct: California had a GSP of $1,850 billion in 2008, whereas Greece's GDP was less than one fifth as large at...

Washington DC has now become the linchpin of lies regarding the US economy. When one looks at the numbers, it is easy to see why this must be so. The Federal budget deficit is now running at somewhere between 14% and 15% of GDP. Because the administration has postponed the budget update past the mandatory deadline, we do not have any official figures so we must estimate based on other data but Americans should be quite used to that by now. The latest Monthly Treasury Statement through June 30 gives us a lot of very useful data. Tax receipts are falling rapidly; for the fiscal year to date, taxes are down from $1,934 billion to $1,589 billion - a drop of 17.8%. The trend has been for the monthly numbers to get worse as the FY has gone on but if that applies to the full year then revenues will be $2,073 billion. The current budget estimate is just under $4,000 billion but will likely be higher as unemployment and related expense rise with a tanking economy. This leaves the US government...

Faking Bank First let's be clear that prices for the majority of asset classes around the world are unsustainably high. This is an obvious corollary to the very inflated state of the global financial system and economy due to the excessive leverage that we have commented upon many times. It bears repeating that central banks ( CBs ) have little actual power, they merely serve as rallying points and fetish-totems for optimistic, true-believing speculators. The evidence is quite clear that CBs often fail to accomplish their goals, in recent cases despite extraordinary actions to "inspire confidence" - i.e. reignite speculation. If the CBs were as powerful as most think, they could not possibly fail to accomplish their goals. Like voodoo, it is the BELIEF of the victim that causes the damage - a negative application of the well-documented placebo effect. While they have succeeded in restarting speculation to some extent in equities and commodities, they have utterly faile...

We would just like to summarize the macro picture of the era we are leaving in order to understand the era we are entering. We have been blogging about the credit dangers on Financial Jenga since 2007 and warning about them even longer than that. The global scope of the financial crisis should surprise no one. Didn't we hear all about "globalization" for many years during the synchronized boom? That level of integration virtually guaranteed that any bust would be synchronized as well. Nearly all other economic ills stem from the mainspring of a deformed and distorted credit system. For many years now, the foundation of the entire world economic system has been the willingness of the average American to spend their entire income - and more besides. This blog described the magnitude of that "more" in its very first entry. That foundation is collapsing and the global system is flying apart as American households suddenly realize that they are in a hole and stop dig...

note: This post was begun some time ago and the date-time stamp reflects the initial draft. The bulk of the data has been added since then. China: The Collapse Begins Chinese exports are collapsing and industrial activity with it. Recent reports suggest that they are experiencing mass factory shutdowns with owners and manager absconding. According to the BBC , migrant workers from rural areas are returning to their homes in the countryside en masse . Those watching the media would think that an shocking collapse came out of nowhere in the last few weeks. Readers of Financial Jenga have known that this was not just possible but virtually inevitable for many months. China could spend some of their dollars but they need to keep at least $1 trillion so the Yuan doesn't completely crash and burn. The interesting problem is the currency mismatch and "sterilization" issues. China's money supply growth is going to fall quickly as there will be fewer incoming dollars against ...

The absurd actions of our financial authorities continue to impress with the sheer hubris and vast scale of their proposals - with today's bailout attempt being the latest and greatest of many attempts. Some of the government's contortions would be impressive even for Cirque du Soleil were they not such a blatant effort to distort the market. Our nation and the world at large seem to be living out the economic equivalent of a Kafka novel today. Yet even here we see the boundaries of government interference and the limits of (unjustified) optimism. As advocates of the free market and rule of law, we have been constantly appalled. A nominally Republican administration continually interferes with market forces and changes investment rules in the middle of the game. How did we come to such a sad pass? Like many children, yours truly had a favorite word for much of his childhood - "Why?" Eventually, I stopped bothering Mother but never stopped asking the question. It is ...

This is total panic time. They're now firing off everything that they have after the first several attempts at an options expiration week stick save failed badly. Basically, the Treasury is guaranteeing virtually everything now with backstops for money market mutual funds and a new super SIV for bad assets. But as Fredrick the Great said: "He who defends everything, defends nothing!" This was a simple acknowledgement of military reality - concentrate on protecting the most important assets. Spreading yourself too thin invites defeat in detail and the destruction of your forces. Then the enemy can loot at leisure. The government seemingly doesn't understand this but they will. There simply isn't the money to do everything and in their arrogance the Fed and Treasury have over-reached badly. By trying to save all of the bankrupt financial companies, they are weakening the defenses of the strategic key - Treasury debt. The bond market is already demanding 50 basis po...

It appears that the abused average American has finally had enough. Target reported that Christmas sales were very weak and lowered their revenue growth numbers for December quite a bit. Add in the margin pressure from discounting and earnings in that sector should be a mess. The problems seem to be widespread and for once, stocks actually seem to be reacting to obvious fundamental problems. This should really be no surprise at all but sadly, equities have ignored fundamentals for so long that it's a shock when reality intrudes on the feeding frenzy. Here at Financial Jenga, we've been documenting the many pressures facing consumers for some time now. Housing and mortgage debt were covered in Where to Start? We wrote about the deteriorating employment situation and failure of government statistics to reflect it in Behind the Numbers . The collapse of personal savings and explosion of total household debt was the theme of First Principles . Why is anyone surprised that a cons...

The fundamental case for a bull market died a long time ago and has not terribly sound in a long, given the combination of high valuations, slowing growth and a significant portion of earnings that were an outright illusion. Strategically speaking, the last time the bull case made any sense was in early 2006. That has not prevented tactical factors from pushing an overvalued market still higher in the interim. The primary tactical focus has been "liquidity" which readers of this blog will recognize as simply a synonym for growing debt. The UDB threw off a tremendous amount of this "liquidity" as debt expanded rapidly. The serial collapse of mortgage finance, CDOs, MBS, asset-backed CP and other debt markets has reversed the flow as outstanding debt/credit shrinks. But how is this affecting stocks, you might ask? Well, there is the obvious collapse of profits in the building and financial sector as well as similar impending action in the consumer sector. But these ar...

It appears that the CBs have managed to stave of an immediate disaster in the financial markets - at least for the moment. Yet any hope of a material turnaround in market conditions seems distant indeed. The entire system was built on an ever-rising tide of debt and confidence. Debt served to expand the money supply and confidence ensured that the larger pool of money would move through the economy at accelerating velocity. Now, fears of default have undermined the willingness to lend and borrow - undermining the psychological conditions necessary to sustain debt growth. At the same time, confidence has been crushed, slowing the headlong rush of money around the globe. The sale of CDOs has fallen dramatically - 35% from June to July. These instruments epitomize both trends; they serve to direct capital into new debt deals quickly while simultaneously taking out loans themselves to leverage the profits from those deals. Confidence has not merely broken, it is shattered. The Fed and othe...

During the Universal Debt Bubble ( UDB ), corporations borrowed a lot of money, so where did it go? Quite a bit of it went into buying other companies as worldwide buyouts reached a record $4.06 trillion in 2006, with about 40% of that in the USA. That was well above the previous record $3.3 trillion in 2000. The difference was that the M&A boom in 2000 was done largely with stock; this one is funded with debt. When things went bad in 2000, the equity didn't have to be paid back, but the debt from the current frenzy will. While a lot of money went to buy other companies' stock, another big chunk funded companies who bought back their own stock. Naturally, all of this debt-funded stock buying has served to prop up equity prices. Many shareholders came to believe that they were in a no-lose position because of continuous demand from buybacks. And if anything went wrong, someone else would swoop in and buy the whole company as part of the M&A wave. That sort of overconfide...

This is such an enormous subject, it's difficult to know where to begin. I'm going to start with the prevalence and destructiveness of excessive debt. The best illustration of that so far is in the housing market. The symptoms there are more obvious and advanced than elsewhere. So let's go to the stats. According to the Federal Reserve mortgage lending grew from $153.8 bil in 1995 to $1,051.8 bil in 2005 - a mere 584% in 10 years . http://www.federalreserve.gov/releases/z1/current/z1r-2.pdf The results were amazingly predictable: housing prices rising rapidly, with a speculative frenzy at the end. It's axiomatic that bubbles can only last as long as there is more money coming in. I'll freely admit that I expected a top in housing in 2004 as the pool of qualified buyers was drained. The lenders fooled us by making further loans to unqualified buyers to keep things going for another 15-18 months. In the end, this has only made things worse naturally. We are at the...