End of the Republic

The American Republic is in decline. The decline is self-inflicted, a sort of suicide by choice. Why are people deciding to follow the "Road to Serfdom" over the "Road to Freedom"?

Location: Chesapeake Beach, MARYLAND, United States

Tuesday, November 11, 2008

Short-term people talk deflation, but what does the market think?

A post from Barron's magazine - does the US government have a "limit" to the amount it can borrow?

Uncle Sam's Credit Line Running Out?
NOVEMBER 11, 2008

The yield curve and credit default swaps tell the same story: the U.S. can't borrow trillions without paying a price.

WHAT ONCE WAS UNTHINKABLE has come to pass this year: massive bailouts by the Treasury and the Federal Reserve, with the extension of billions of the taxpayers' and the central bank's credit in so many new and untested schemes that you can't tell your acronyms or abbreviations without a scorecard.

Even more unbelievable is that some of the recipients of staggering sums are coming back for a second round. Or that the queue of petitioners grows by the day.

But what happens if the requests begin to strain the credit line of the world's most creditworthy borrower, the U.S. government itself? Unthinkable?

American International Group which originally had to borrow what was a stunning $85 billion from the Fed to keep it from cratering in September, upped the total Sunday to $150 billion.

Monday, Fannie Mae reported a $29 billion third-quarter loss, far in excess of forecasts, raising the specter that the mortgage giant may need more money after the Treasury pledged to inject $100 billion in preferred stock financing in September.

Meanwhile, American Express received Fed approval to convert to a bank holding company, joining the likes of Morgan Stanley and Goldman Sachs, that have a direct pipeline to borrow from the Fed or the Treasury's TARP, the $700 billion Troubled Assets Relief Fund.

And, of course, Detroit is looking for a credit line from Washington. General Motors (GM) Friday warned it could run out of cash next year without a government loan. GM plunged another 23% Monday, to 3.36, as several analysts helpfully recommended selling shares of the beleaguered automaker that already had lost more than 85% of their value.

Visiting the White House Monday, President-elect Obama pressed President Bush to support emergency aid for GM and other automakers. The prospect for federal aid for GM ironically weighed on its shares as one bearish analyst said the price of the bailout could be a wipeout of common holders.

Be that as it may, it's all adding up. If the late Sen. Everett Dirkson were around today, he might comment that a trillion here, a trillion there and pretty soon you're talking about real money.

Trillions are no hyperbole. The Treasury is set to borrow $550 billion in the current quarter alone and $368 billion in the first quarter of 2009. "Near-term pressures on Treasury finances are much more intense than we had thought," Goldman Sachs economists commented when the government announced its borrowing projections last week.

It may finally be catching up with Uncle Sam. That's what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.

The yield curve simply is the graph of Treasury yields of increasing maturities, starting from one-month bills to 30-year bonds. The slope of the line typically is ascending -- positive in math terms -- because investors would want more to tie up their money for longer periods, all else being equal. Which it never is.

If they expect yields to rise in the future, they'll want a bigger premium to commit to longer maturities. Otherwise, they'd rather stay short and wait for more generous yields later on. Conversely, if they think rates will fall, investors will want to lock in today's yields for a longer period.

The Treasury yield curve -- from two to 10 years, which is how the bond market tracks it -- has rarely been steeper. The spread is up to 250 basis points (2.5 percentage points, a level matched only in the past quarter century in 2002 and 1992, at the trough of economic cycles.

Based on a simplistic reading of that history and the Cliff Notes version of theory, one economist whose main area of expertise is to get quoted by reporters even less knowledgeable than he, asserts such a steep yield curve typically reflects investors' anticipation of economic recovery.

Never mind that the yield curve has steepened as the economy has worsened and prospects for recovery have diminished. Like the Bourbons, the French royal family up to the Revolution, he learns nothing and forgets nothing.

As with so much other things, something else is happening this year.

The steepening of the Treasury yield curve has been accompanied by an increase in the cost of insuring against default by the U.S. Treasury. It may come as a shock, but there are credit default swaps on the U.S. government and they have become more expensive -- in tandem with an increase in the spread between two- and 10-year notes.

This link has been brought to light by Tim Backshall, the chief analyst of Credit Derivatives Research. The attraction of investors to the short end of the Treasury market is "juxtaposed with the massive oversupply and inflationary expectations of the longer end," he writes.

Backshall is not alone in this dire assessment. Scott Minerd, the chief investment officer for fixed income at Guggenheim Partners, a Los

Angeles money manager, estimates that total Treasury borrowing for fiscal 2009 will total $1.5 trillion-$2 trillion. That was based on $700 billion for TARP, a $500 billion-$750 billion "cyclical deficit," an additional $500 billion stimulus program and some uncertain amount for the Federal Deposit Insurance Corp.

Minerd doubts that private savings in the U.S. and foreign purchases of Treasury debt will be sufficient to meet those government cash. That leaves the Fed to take up the slack; that is, monetization of the debt.

However it comes about, Backshall's charts of the yield curve and the spread on U.S. Treasury CDS paint a dramatic picture. Both the yield spread and the cost of insuring debt moved up sharply together starting in September.

Let's recall what happened that month: the Fannie Mae-Freddie Mac bailouts, the AIG bailout and the Lehman Brothers failure. The two lines continued their parallel ascent with the announcement and ultimate passage of the TARP last month. And evidence mounted of an accelerating slide in growth.

Cutting through the technical jargon, the yield curve and the credit-default swaps market both indicate the markets are exacting a greater cost to lend to Uncle Sam. And it's not because of anticipated recovery, which would reduce, not increase, the cost of insuring Treasury debt against default.

All of which suggests America's credit line has its limits.

At the beginning of the Clinton Administration in the early 1990s, adviser James Carville was stunned at the power the bond market had over the government. If he came back, Carville said he would want to come back as the bond market so he could scare everybody.

President-elect Obama may come to think Clinton had it easy by comparison.

Sunday, November 09, 2008

No credit crunch here

Zimbabwe's central bank is doing all it can to put liquidity into the hands of its citizens... it has been so generous, it has even started printing Z$ 1,000,000 notes (just a month after it introduced its $50,000 note)...

This table shows a condensed history of the foreign exchange rate of the 3 Zimbabwean Dollars to US Dollars:

First Dollar
Month Exchange rate
1983 1
1997 10
2000 100
Jun 2002 1 000
Mar 2005 10 000
Jan 2006 100 000
Jul 2006 500 000+

Second Dollar
Month Exchange rate
Aug 2006 650
Sep 2006 1 000
Dec 2006 3 000
Jan 2007 4 800
Feb 2007 7 500
Mar 2007 26 000
Apr 2007 35 000
May 2007 50 000
Jun 2007 400 000
Jul 2007 300 000
Aug 2007 200 000
Sep 2007 600 000
Oct 2007 1 000 000
Nov 2007 1 500 000
Dec 2007 † 4 000 000
Jan 2008 6 000 000
Feb 2008 ‡ 16 000 000
Mar 2008 70 000 000
Apr 2008 100 000 000
May 2008 777 500 000
Jun 2008 40 928 000 000
Jul 2008 758 530 000 000

Third Dollar
Month Exchange rate
Aug 2008 1 780
Sep 2008 590 000
7 Oct 2008 2 300 000
14 Oct 2008 10 700 000
21 Oct 2008 1.22 Billion
28 Oct 2008 251 Billion
8 Nov 2008 663 Trillion

Now, US monetary base figures....

These are NOT seasonally adjusted.

Date Monetary

 2007-Oct.     828373 
Nov.     833052 
Dec.     836432 
 2008-Jan.     831104 
Feb.     828692 
Mar.     832358 
Apr.     830494 
May      833974 
June     839085 
July     846462 
Aug.     847302 
Sep.     908052 
Oct. p   1132799 

Two weeks ending
 2008-Sep. 10  849866 
     24  915072 
Oct.  8  988653 
     22  1146416 
Nov.  5p 1239747 

Nice growth in the past few months, eh? If the "greedy" banks were not keeping most of that new liquidity on deposit at the Fed, it would be out as cash in our hands. It still may end up there...

J. Thyme Matz

Imperial Presidency, continued

Any hopes one may have held that Obama would seek to reduce the amount of power that Bush and his earlier ilk took into the executive branch are short lived - so short they end even before he is sworn into office.

He intends to have an "immediate impact" on policy by making law using executive orders.

"President-elect Obama plans to use his executive powers to make an immediate impact when he takes office..." John Podesta, an Obama spokesman continues... "There's a lot that the president can do using his executive authority without waiting for congressional action, and I think we'll see the president do that," Podesta said. "I think that he feels like he has a real mandate for change. We need to get off the course that the Bush administration has set." Our "esteemed" ivory tower professors even get their say since these orders "have the power of law and they can cover just about anything."

Of what point is a democracy or a republic when an executive can create law that covers almost any topic?

No wonder congress has a low approval rating. Considering they have left the law-making of the country to the executive branch and delegated everything else to the bureaucracy, what are they actually doing?

J. Thyme Matz

Argentina first, USA second

Argentina's governent, at risk of default, recently seized the nation's private pension funds to give the goverment access to millions of dollars of savings. The government does not plan to use this money to pay retirees or allow them to keep that which they have saved, instead it will use money to pay its current debts and current expenses. It will "give" the retirees government debt in exchange for their cash and investments. Considering its debt is already in danger of default, this is a horrible deal for Argentinian investors (and the stock market there shows the results). What can they do? It is the law to fork over your savings to the government now.

It could not happen here, right? Wrong...

According to this, not only will the tax-free status of our 401(k) be at risk, so too will the initial investments. The ultimate aim of this will be to seize your assets (cash and investments) and replace them with a government bond (an IOU). The fact that you already could have all your 401(k) investments in a government bond by choice notwithstanding. That means, your right to choose your investments will actually be taken away. Quoting from the article "Democrats will seize on the opportunity [the financial crisis] to attack a program where investors control their own destiny"

Watch for the coming inflation (another way to confiscate savings)!

J. Thyme Matz

Wednesday, November 05, 2008

New Zealand

For those of you who are unaware (and there should not be many), my family and I have moved to Wellington, New Zealand (to put our money where our mouth is) and we felt a great deal of relief when leaving the states (like we were the last people off the Titanic watching as everyone else votes for the iceberg).

Guy Fawkes day was yesterday and it was fun to watch all the homemade fireworks displays. We heard that children used to take old shirts and stuffing (to represent the body of Mr. Fawkes) and tour the neighborhood asking for "a penny for Guy" (or something similar). I find it strange that with such a tradition there is such an antagonism to Halloween. I cannot explain this contradiction.

Big lament about being away from the states:
1) No dog - he had to stay in the states with family.
2) Nothing good to eat - this place does not have good food. Supermarkets offer very little and restaurants cater to a bland taste.
3) Related to above - no Doritos. This is the first country I have been to that has not offered a bit of Frit-o-lay!

J. Thyme Matz

Silent Majority

Before anyone out there claims “mandate” or “landslide”, please take into consideration the following...

Total US Population 305,584,303

Votes for Obama 63,353,266

PCT of Total US voting for Obama 20.73%
Number of eligible voters 231,229,580

PCT of eligible voters 27.40%
Number of registered voters 169,000,000

PCT of registered voters 37.49%

Anyway you slice it, Obama does not have a mandate by these figures. He does not even come close to achieving 50% of votes of registered voters.

In fact, only 20% of the population (total) even voted for him. How do the dogmatic democrats (not political party, but blind supporters of democracy as a panacea) justify this? What does this 20% “get” out of an Obama presidency at the expense of the other 80%?
Answer: What they deserve.
Problem: They are taking the other 80% with them along for the ride.

That is the difficulty of having created the “Imperial Presidency”. Pre-FDR, a presidential election result did not matter (with few exceptions like the civil war) as the role of the chief executive was limited and not some “all-powerful, all-influencing” job (save for Lincoln and his suspension of habeas corpus which is a whole other discussion). Remember, presidents like Washington and Coolidge (“if nominated, I will not run. If elected, I will not serve”) simply moved away from this job even though they could have continued in office!

1980 – Reagan won by a lot… 1996 Clinton, too (for recent history)

Also – I want you to ALL notice how the Democrats were RED and Republicans BLUE! A reversal of today. Dems did all they could to remove the “red” from themselves (since it is the color/symbol of communism/socialism).

Ronald Reagan George Bush Republican 43,903,230
James Carter Walter Mondale Democratic 35,480,115

Bill Clinton Albert Gore Jr. Democratic 47,400,125
Robert Dole Jack Kemp Republican 39,198,755

Let alone 1936….

F. Roosevelt John Garner Democratic 27,752,648
Alfred Landon Frank Knox Republican 16,681,862

How about 64?

Lyndon Johnson Hubert Humphrey Democratic 43,127,041
Barry Goldwater William Miller Republican 27,175,754