The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery
The Daily Reckoning
Monday, February 15, 2010 The Daily Reckoning - Special Reports:
Monday, 15 February 2010
Joel Bowman, reporting from Taipei, Taiwan...
The Day of Reckoning is postponed, but not canceled. Markets in the US are closed today. Americans celebrate President's Day, on which Bill offers some musings below. Trading across much of Asia is closed, too. Investors in China, Taiwan, Hong Kong, Singapore and Malaysia look to the heavens for guidance, wondering what the Lunar New Year will bring.
Elsewhere in Asia, investors took stock of more earthly goings on...and hit the "sell" button. Indexes fell in Bombay, Tokyo, Sydney and across the Middle East. People are worried about the Greeks and the Dubai Emiratis. Both sovereigns are deep in debt. Both suffer crises of solvency...and both seek to delay their own Day of Reckoning, when debts must be repaid and promises met.
Last Thursday, European Central Bank President, Jean-Claude Trichet, hinted that the euro-nations would come to the aid of their struggling Mediterranean cousins, provided that Greece take "extra measures to make its recovery plan credible." Mr. Trichet yesterday defended his decision to extend the monetary olive branch to Greece and sought to quell murmurs of incredulity among investors who, by Friday, were unsure whether the continent would abide a full blown bailout of the moribund Mediterranean debtor.
"When President Sarkozy, Mrs. Merkel, Silvio Berlusconi in Italy and President Zapatero in Spain, in his capacity as president of the European Union, sign the same document, it's serious," Mr. Trichet assured Europe.
As members of the dubious "PIIGS" club - Portugal, Italy, Ireland, Greece and Spain - leaders Berlusconi and Zapatero would seem to have a vested interest in erecting a bailout precedent. They will likely be panhandling around Europe in the not-too-distant future themselves. But what about the others? How many Berliners, for example, are comfortable sending their money on a Mediterranean vacation without them?
"Not enough," would be our guess. A poll published in the German newspaper Bild am Sonntag indicates that more than half - 53 percent - of Germans support booting Greece out of the euro-zone altogether. And anger is growing within Frau Merkel's own ranks.
"If we start now, where do we stop?" Michael Fuchs, deputy head of Merkel's conservatives in parliament, remarked of the Greek question.
From the ruins of Greece to the Middle East's modern day Tower of Babel, the threat of sovereign collapse continues to weigh on investor sentiment. Dubai, home of the world's tallest building and scariest elevators, is yet to come up with a plan on how it will restructure its own rotten debt. News from Zawya Dow Jones over the weekend hinted that the state-owned Dubai World might offer creditors 60 cents on the dollar for the $22 billion it has outstanding.
Predictably, the cost of insuring against a Dububble default rose sharply in trading this morning. The WSJ reports:
"Dubai's five-year credit-default-swap spread - a key measure of credit risk - widened around 0.23 percentage point to 6.50 percentage points in early trading Monday, according to CMA DataVision.
"The widening means it now costs around $650,000 a year to insure a notional $10 million of Dubai's sovereign debt against default for five years, up from around $627,000 at Friday's close. A month ago, it cost $421,000."
Debts...deficits...bailouts and backstops; the question of whether to let the weakest hands fold is by no means a new one. Late in 2008 and throughout most of last year, politicians in the US wrestled with the question of whether this or that private institution was "too big to fail." Being spineless politicians, they didn't wrestle very hard. In most cases, public funds were poured into the most profligate pockets in an effort to "save" idiot institutions from their own actions. We noted as much in our coverage of this year's Unofficial, Unauthorized Daily Reckoning Financial Darwin Awards. But transferring debts from private to public balance sheets doesn't make them disappear. Eventually, they have to be repaid...or defaulted on.
Allowing Europe's PIIGS to feed at the public trough will undoubtedly undermine credibility in the already embattled euro. (The sixteen- nation currency currently trades at an 8-month low.) Trichet & Co. can cut their swine loose...or they can follow them over the cliff.
In today's guest essay, former comptroller general of the United States, David Walker, discusses "D-word" (debts, deficits, dollar) implications a little closer to home...
--- A Penny Stock Fortunes Special Report ---
If You Started With $200 in August 2007, You Could Have Been Sitting on $5 Million by November 11, 2008, Thanks To...
Wall Street's Most Profitable Stock Strings Revealed AT LAST...
Inside: Exclusive details about four stocks set to rise as much as eight times over in the next year. If I don't deliver gains, I'll give you DOUBLE your money back. Some Amazing Gains In The Last Year in this Explosive Market Sector...
Don't Believe Me? Then Check These Gains Out.
---------------------------------------------------------------
The Daily Reckoning PRESENTS: The simple fact that you read these pages suggests that you are concerned with where the nation is headed, both economically and politically. But what do your fellow citizens think? Are they concerned with rising deficits and debased dollars? The answer may surprise you. David Walker has the details in today's essay...
What People Want
By David Walker
New York, New York
President Obama has to maneuver his way through a lot of constituencies, including Democratic senators and congress members, his own staff, and special-interest groups. Underneath it all, he may actually be a fiscal reformer. If he enacts major fiscal reforms, he will have one indispensable constituency on his side: public opinion. Ask the American people, and they will tell you overwhelmingly that our sustained fiscal health is fundamentally important.
In fact, we at the Peterson Foundation did ask them. The foundation commissioned a rigorous national poll by Hart Research Associates and Public Opinion Strategies in late March 2009. We wanted to see whether the recent hard times had made people more likely to accept reforms. And the answer was yes.
Above all, Americans told us that they want to get the economy back on track. But their second priority for the Obama administration was somewhat surprising. They wanted the president and the Congress to address our escalating deficits and debt levels. A cynic might suggest that it's easy to endorse fiscal responsibility - as long as the money to pay for it doesn't come out of your own pocket. Bill Clinton succeeded with the help of a strong economy; in the 1990s, we didn't feel that the government was picking our pockets. In the 2010s, our weak economy could work for Obama: We have seen what irresponsible spending can lead to, and it's scary. With the right leadership, Americans may be ready to accept tough choices to secure a better future.
You can't get a better consensus for reform than we found. In summary, 73 percent of Republicans rated our growing budget deficits and national debt as a very big threat, along with 72 percent of independents and 58 percent of Democrats. About 90 percent wanted Washington to take action to address these issues. Somewhat surprisingly, the respondents rated this issue as being more important than health care reform and middle- class tax cuts. Americans also saw escalating deficits and debt as a danger more serious than global warming and our declines in education and manufacturing. In our poll, public concern about our economic future even trumped fears of a rogue nation developing a nuclear weapon. That's what I call concern!
Yes, public opinion can shift quickly as the wind changes. If terrorists attacked us again on our home soil, the poll numbers would change. But my point is that in the early phase of his term, Obama had powerful public backing for the "grand bargain" on taxing and spending that, in January 2009, he said he wanted to achieve during his presidency.
Public concern continued to increase in succeeding months. In fact, it was manifest not just in more recent public opinion polls, but in public anger during many town hall meetings during Congress's August 2009 recess. It's true that some of the assertions and actions by protesters in town hall meetings regarding the pending health care reform proposals were inaccurate, inappropriate, and irresponsible. However, people had a right to be concerned about out-of-control spending and about plans to further expand the federal government. I fully expect that public concern will increase more now that the August 2009 long-term deficit projections have been released and Washington pushes for even more health care entitlements.
We've heard other presidents make strong statements regarding fiscal responsibility. Even President Bush 43 pledged to be fiscally responsible. Boy, was he telling a whopper! Let's be fair to President Obama. It's still early in his first term. However, as of this writing, there is no plan to put a process in place to achieve a "grand bargain" or to seriously reform federal spending programs and tax policies. Hopefully, one will be coming soon - possibly as part of his fiscal 2011 budget proposal, which is due in February 2010.*
Cracks are continuing to appear in our government's financial foundation. In the fall of 2009, the Federal Deposit Insurance Corporation, which insures our bank deposits, revealed that it faced serious cash-flow challenges. So did the Transportation Department's Highway Trust Fund. And the Social Security Administration disclosed that the retirement and survivors insurance program was expected to pay out more than it took in during 2010-11.
Regards,
David Walker
for The Daily Reckoning
Joel's Note: Mr. Walker served as United States Comptroller General from 1998 through to 2008 and is now the President and CEO of The Peter G. Peterson Foundation. He is also the author of Comeback America: Turning the Country Around and Restoring Fiscal Responsibility, from which the above essay is excerpted.
Daily Reckoning readers may also recognize Mr. Walker as the protagonist in Agora's economic documentary, I.O.U.S.A. If you haven't seen it yet, or would like to add a copy to your DVD collection, you can grab one for free, along with a subscription to the Capital & Crisis bailout report, here.
*Since Mr. Walker penned the above words, President Obama delivered hisBudget of the United States Government, Fiscal Year 2011. We want to know, does this look like a "grand bargain" to you? Does it constitute a serious plan to reform federal spending programs and tax policies? Drop us a line here:joel@dailyreckoning.com
---------------------------------------------------------------
And now over to Bill Bonner with today's reckoning from Paris, France...
No lobbyist left behind!
That's the new motto of the whole Washington establishment. Every spending bill has something in it for everybody.
Today is a holiday in America. It's "Presidents Day," a day set aside for Americans to honor those who rule over them. Most Americans think of Washington, Lincoln and Roosevelt...but here at The Daily Reckoning we honor America's truly great presidents - William Henry Harrison, Chester Arthur and Warren Harding - those who didn't make things worse.
But look on...ye dead chiefs...at what your country has become:
Europe has only 1,800 registered lobbyists. There are 15,000 of them in the US. Most of them probably live in our new neighborhood...getting in our way as we drive around the Beltway...taking our parking places...hogging the tables at Starbucks... The parasites!
The Financial Times reports that companies spent more on lobbying in 2009 than they had the year before. Investment in new plants and equipment fell dramatically. But investment in lobbying rose by 5%.
You don't need a Ph.D. in political science or economics to figure out why. Returns from lobbying were higher. That is the big shift in the US economy...the final shift.
We'll come back to this theme in a minute. First, let's look at what happened on Friday. Just to set the stage...we're trying to figure out whether the stock market has entered a declining phase. At the beginning of last week, we thought so...by the end of it we weren't so sure. And on Friday, the evidence was mixed. The Dow fell 46 points, but still ended up for the week. Gold dropped $4.
As to the economy, the evidence was mixed too. Consumer spending rose in January...but consumers are still reluctant to spend. And they don't have any money to spend anyway...
So let's return to our Presidents Day theme...
The US economy began as a frontier economy on the tidewater area of the East Coast...with a few big planters, but mostly small farmers, merchants and artisans.
Then came the entrepreneurs with their mills and factories.
Then, a few of the entrepreneurs grew to be captains of industry - the Vanderbilts, Carnegies, and Rockefellers.
When the inventors, founders and innovators died off, their businesses were taken over by corporate managers.
And then the leading corporations shifted their focus, from making things to marketing them. This shift corresponded roughly with the ascendancy of New York over Chicago...and, then after 1980, the focus shifted again - to financing. Wall Street grew rich. Motown - Detroit's automotive industry - fell into decline. For a while, even the auto businesses made more money financing cars than they made building them.
Finance blew itself up in 2007-2009. Now, there's a new shift underway...from the private economy to the government. Mommas in the '20s and '30s wanted their babies to grow up and go into manufacturing. In the middle of the century, marketing was more rewarding - Madison Avenue was the best address in America. And by the end of the century, the best and the brightest were headed to finance.
Where should bright young grads go now? Well, follow the money...! Where's the money now? Not in manufacturing...at least not in US-based manufacturing. And not in marketing either - gone are the days of selling soap to big families with big pay raises. How about finance? Forget it. The boom in credit lasted more than 50 years. But who can borrow now? Only the feds. Sure a few big banks will make money by helping the feds raise cash. But the big expansion in consumer credit is over.
Now, government is about the only major industry that is expanding. The feds have the money now. They're even handing it out. Get in line!
--- Outstanding Investments Gold Investment Report ---
From Hulbert's No 1-Ranked Advisory Letter Over 5 Years, Our Most Shocking Forecast Yet...
GOLD $2,000
"I'm so sure gold will soar higher I'll even make you a guarantee... plus, I'll give you five entirely new ways to play the trend..."
"Including one hidden way to snap up gold... for less than one penny per ounce..."
How can that be possible? Give me the next four minutes and I'll show you how...Details Here.
---------------------------------------------------------------
And now, back to our Presidents Day perambulation...
Remember our Daily Reckoning Dictum:
Anyone can make a mistake, but to really make a mess of things you need taxpayer support. Well, now the feds are getting plenty of it...
Over the last decade, federal spending in the US has gone from less than 35% of GDP to well over 40%. In Britain, the increase has been even more dramatic, from about 36% of GDP to nearly 55%.
Not only are the feds taking up a bigger percentage of GDP, they're also becoming bossier. During the Bush years the federal register recorded 7,000 more pages of new rules.
And, of course...they're making a monumental mess of things. They're spending money they don't have on things no one in his right mind would pay for with his own money.
Want an example? Go to Jonestown, Pennsylvania. They've got an airport there that is the envy of travelers everywhere. Lots of airport, in other words...few passengers. That's because John Murtha - when he was still among the quick - used his power in Congress to build an airport that would be convenient for him...and reward local contractors and unions who had supported him over the years.
Few politicians dug more deeply into the pork barrel than John Murtha. But almost all stick their hands in it. Why else would you bother with the trials and tribulations of 'public service?' There's got to be a payoff that makes it worthwhile, right? Of course, there are a few - like our friend Ron Paul - who are just trying to do the right thing. But for every Ron Paul there must be dozens of Congressmen and federal employees who are in it for the power, the money - or both. (Neither Stalin nor Hitler squeezed much personal wealth from the taxpayer tube. Mao Tse-tung, on the other hand, knew how to live - with plenty of palaces and young women. Most government employees are probably more like Mao than Adolph. That is, they are motivated by money as well as power.)
Have you wondered why the costs of running for public office have soared? That's obvious too - because the stakes are higher. As the federal budget grows so does the pork that each member of congress can pull out of the barrel.
The number of congressmen is more or less constant (though it grows with population...after a 10-year lag for the census). But the amount of money given out increases...making each congressional seat more lucrative. You can do the math yourself, but the point is - crime pays. At least, for a while...
The trouble with crime is that it only makes the criminals rich. Everyone else gets poorer. That's the problem in places such as Nigeria and Haiti. Crime pays. Nothing else does. Economists have done studies of this...and, of course, they've discovered the obvious. In "high trust" societies, people are wealthier. No wonder; when people know they won't be ripped off, they accumulate more money.
A high trust society is one where property rights are respected...and where the rules of the game are known...and change very slowly. A change in tax rates, for example, discourages wealth - especially if it comes unexpectedly. So does a change in monetary policy. When people don't know what to expect from the currency they become reluctant to invest for a long-term payoff. Instead, they invest in lobbying.
For the most part, tax rates haven't gone up. Instead of taxes, government gets its money from borrowing. The immediate effect is much the same; resources are absorbed out of other sectors of the economy and into the public sector. Once in government service, they are used inefficiently or completely squandered. Result: John Murtha gets an airport...a kid in Brooklyn doesn't get a bicycle... The long-term effect is unknown...but will almost certainly be unwelcome. The government will eventually be unable to borrow at low rates...and unable to finance its deficits. This will result in default...or hyperinflation...or both. In anticipation, trust in the future will go down...and so will America's wealth.
That's why the shift to politics is the FINAL stage of an economy... It is inherently wealth-destroying. In politics the rewards are distributed according to who you know or who you are. What you know and what you can do scarcely matters. Trust declines...because the rules change as wealth is taken away from some and given to others. The incentive to produce new wealth declines. Investments in new capital, new businesses, new innovations and so forth go down. Investments in lobbying go up. The insiders get rich. The rest get poor. And the nation's wealth declines...along with its economy and its power. This will continue until the political sector blows itself up - either in default, bankruptcy, hyperinflation, revolution or defeat by a foreign power. Then, the cycle can begin again.
Regards,
Bill Bonner,
for The Daily Reckoning
---------------------------------------------------------------
Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com
Posts
