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What $4 billion of deficit spending per day does to a sinking economy, This measure has unemployment over 21.5%, near depression heights, Plus, Bill Bonner on the fallacy of Summers' "escape velocity" and plenty more... The Daily Reckoning | Friday, April 9, 2010 The Follies of Federal Reserve Chairmen Greenspan’s legacy and the nature of Bernanke’s “difficult” choice Bill Bonner Reporting from Baltimore, Maryland... Poor ol' Alan... We almost felt sorry for him... "Maestro mauled..." said the headline in The Financial Times. We wanted to maul him many times. But now that others were doing it...it made us feel sympathetic to the old scalawag. Didn't the Alan Greenspan Fed's failure to curb subprime lending deserve to go into the 'oops' category, demanded chief tormentor Phil Angelides. Mr. Greenspan defended his legacy. He was right 70% of the time, he said. The other 30% of the time he was wrong. Hey, that's not bad. Pity it's not true. Greenspan was wrong 90% of the time - at least. He thought those fancy derivatives actually spread the risk of failure...and made the system more stable. He thought those subprime loans helped people of modest incomes realize the goal of home ownership. He saw no risk in keeping the key rate at an 'emergency' low level...years after the emergency had passed. But he hit one of those magic moments last week...when he was finally right about something. He declared that the yield on the 10-year note was "the canary in the coal mine." This week, the canary wobbled...but stayed on his feet. He's still standing...but looking a little peaked. More below... While the former Fed chief was in the spotlight at The Financial Times yesterday, the present Fed chief was front-page news over at The Washington Post. Alan Greenspan is a scoundrel, no doubt about that. But he was, in some ways, a better Fed chief than Bernanke. The trouble with Bernanke is that he doesn't know his limitations. He actually believes the Fed can look at the possible outcomes going forward and improve them before they come out. "Fed chief sounds a deficit warning," is the headline. He said Americans faced a "difficult choice." It's between higher taxes and fewer entitlement services, he said. This doesn't seem like a difficult choice to us. We'd gladly accept fewer "services" from the feds if they'd lay off on the taxes. But that's because we're in the half of the US households that actually pays taxes. No kidding; the report was in yesterday's news: "Almost one half of US households pay no federal income tax." So, welcome to the beginning of the end. If half the citizens get bread and circuses without paying for them, you can bet that the whole shebang is headed for destruction. The math doesn't work. Half the people have no interest in curbing taxes or spending. Obviously, those people would prefer to raise taxes - on us - rather than give up their free pills and retirement benefits. Even among the half that does pay taxes, most pay very little - less than they get back in 'services.' Meanwhile, the 'rich' get socked hard. According to the reports we're seeing on scurrilous blogs and from our usually unreliable sources, the tax burden on the rich is set to rise over 60% of income - thanks to the health care charges they will have to bear. By the way...the whole thing is a fraud. The services, that is... Here's how it works. In 2007, the private sector finally blew itself up - thanks largely to all that debt offered by Wall Street and encouraged by the Alan Greenspan/Ben Bernanke Fed. So then...in comes the Fed again...and the US government...wearing white hats and pretending to save the situation. How? By bringing more of the economy under their control! As far as we can tell, the last successful government program was WWII. And that was only successful because the competitors' programs were also run by government. But that doesn't stop them... More below, after today's column... From The Desk of Addison Wiggin... Why We Left Wall Street... And How You Can Grab Three FREE Issues of Our Most Important New Service... Tentatively titled Addison Wiggin's Apogee Advisory, our newest research service is currently in the "beta-testing" phase... In short, the letter aims to connect the dots between the analysis you read about in my daily e-letters/best selling books and the actual investment recommendations we recommend you follow. You might say it's where "the rubber meets the road." Right now you can grab the First Three Issues Free. For More Details, See Here. The Daily Reckoning Presents A Space Oddity Bill Bonner Since 1946, at least in the US, the skies got a little bluer every day. Consumer spending increased nearly every year. At first, consumers spent what they earned. And then came the wonder years...when they spent more and more money they hadn't earned yet. Then, in the 20 years leading up to 2007, incomes scarcely rose. But standards of living went up anyway. How was it possible? Easy. Instead of saving 8% of their incomes, as they had for the previous 5 decades, they spent the money. The savings rate fell to near zero. Debt increased. Of course, you can only take a thing like that so far. In this case, the end of the credit expansion came three years ago. All of a sudden consumers were faced with a grim prospect. They could no longer spend money they didn't have. Now they had to NOT spend money they DID have. It was pay back time...time to return the money they had borrowed during those carefree years. Settling up was so alarming and so disagreeable that the feds swung into action to prevent it. First came the monetary stimulus - with the Federal Reserve's key rate reduced to zero...and the Fed empowered to buy $1.7 trillion worth of toxic loans from shaky lenders. Second, the federal government itself greatly increased its spending - adding $4.11 billion of deficit spending every single day since September 2007. And now, US Treasury Secretary Larry Summers says the recovery has reached "escape velocity." Whether or not he correctly judges the speed of the economy, we don't know. But we're sure he's wrong about gravity. According to the official stopwatch, 163,000 people found jobs in America last month. Forty-eight thousand of them were jobs with the US census bureau. Those jobs are temporary and useless. If you could create wealth by having people count one another, perhaps we could create even more wealth by having them count the stars in the heavens or the grains of sand on Malibu beach. Take off the counters and that leaves 114,000. Now take off the statistical adjustment for births/deaths, and the statistical adjustments for bad weather, and the statistical legerdemain that disappears people who are too discouraged to continue to look for work, and you have a negative number. The economy actually lost jobs in March. According to John Williams, who keeps track of the figures, joblessness rose in March to 21.7% - just a tad lower than the worst figure from the Great Depression. Now, we turn to savings rates. Some analysts say savings are on the rise - showing consumers' 'pent up' buying power for the future. Other analysts note a recent downturn in the savings rate. That, they say, shows consumers' willingness to spend now. Both are wrong. It will be a cold day in Hell when Americans are not willing to spend. What is at issue is not the spirit but the flesh. The Baby Boomers were flying high during the wonder years. They looked forward to higher house prices and rising stock prices. But now, after having suffered an $11 trillion loss in stocks and real estate, what can they do? Gravity is pulling them back down to earth. Like it or not, they have retirement to think about. That's why they have not participated in this stock market rally; inflows into mutual funds are running at only a quarter of their '90s rate. The boomers know they can't trust their retirement to the stock market. They've got to spend less. Nor does a rising savings rate mean what analysts think it means. Savings are not simply 'pent up' spending for the future, not following a 63-year-old credit expansion; the money was spent years ago. Bankruptcy filings hit a record in March - at 6,900 per day. This debt elimination is registered as an increase in "savings." But it's not the kind of savings that you can spend at the liquor store. Meanwhile, Alan Greenspan says rising bond yields are "the canary in the coal mine." This week, the canary was still alive...but wheezing...with yields on the 10-year note over 4%. Why? Probably, it is because the Fed is no longer, indirectly, buying US Treasury debt. Until last week, the Fed bought the banks' bad mortgage-backed securities. The banks returned the favor. Rather than lend to the private sector, they bought US notes and bonds. In the private sector, bank credit is still contracting, with commercial and industrial loans falling at a 17% rate over the last 3 months. Revolving credit - auto loans and credit cards mostly - is down for the first time ever. The money supply is contracting too. M2 is declining at a 0.2% rate and MZM going down at a 5.4% speed. Consumer prices are still dropping in the US. In Europe, too, inflation is at record low levels - 1.5% annually. And Goldman Sachs economists predict further drops in the CPI - to 0.3% in the US and 0.2% in Europe. Escape velocity? Looks more like stall speed to us. Bill Bonner for The Daily Reckoning Joel's Note: If you're what Bill likes to call a "long suffering reader," you'll know that our Reckoner-in-Chief is a very well-traveled man, with contacts from Bombay to Buenos Aires and back again. If you think you could benefit from the kind of "who-you-know" investment information this kind of contact list affords, you might be interested in this invitation from the Bonner & Partners Family Office. Details Here. Gold Climbs to 3-Month High... Rockets Towards $1,200 per ounce... Nice move, right? But, even better, here's a way you can actually... Triple Your Gold Gains With "Slingshot Options" Every time gold goes up $1, this "slingshot option" could pay you $3 or more...with gains as high as 620% by June 2010. Find Out How Here. Bill Bonner US Economic Boat Sinking in the Money Flood Bill Bonner And now the rest of today's reckoning... Does anyone seriously think the feds can do a better job? These are the people who run the Post Office...and Amtrak, for Pete's sake. Even with monopolies, they can't make money. Now they're the majority owners of auto companies, insurance giants and mortgage firms. Hardly anyone buys a house in America anymore without the help of a government-owned mortgage business. And soon, you won't be able to get a doctor to take your temperature - assuming they still do that - without getting a bureaucrat's approval. In theory, the feds take charge of more of the economy, and spend more money, so they are able to keep the GDP from going down. The feds have been pumping about $4 billion per day of deficit spending (money they didn't collect in taxes) into the economy. The bankers say 'thank you very much' for the business and pay themselves big bonuses. But this money doesn't stimulate the private economy...it replaces it. But it replaces it with zombie 'growth.' The government-driven part of the economy is largely brain-dead. It is a waste. What real, positive boost to prosperity comes from someone filling out health care forms for the feds? What benefit do we get from tax accountants? How about from the ambulance-chasing lawyers? (Yesterday, driving to work, we saw an ad in Baltimore's inner city: "Birth injury? Malpractice? Workplace injuries? You need a lawyer!") How about from any of these multitudes of mid-level bureaucrats...lobbyists...handlers...interveners...meddlers...? The feds spend money. But the money is like warm water to a boat hull. It just stimulates the barnacles. Gradually, the boat slows...and sinks. What can you do? Haul it out and scrape the barnacles off! That's what Ben Bernanke is proposing. But wait...the barnacles vote! And they make campaign contributions... But here is Ben Bernanke talking tough. 'If you don't straighten up,' he seemed to say, 'you're going to end up like Greece.' Wait...this has a familiar ring to it. This is the same Ben Bernanke who is holding rates near zero to make it easier for the feds NOT to straighten up. Like those of his predecessor, Bernanke's centrally- controlled lending rates are sending out just the wrong signal at just the wrong time. And like Greenspan, he can get away with it...for now. But maybe not for long. On Monday, US T-note yields ran over 4%. "The fun's over," said old-timer Richard Russell. It looked like the end had come for the long bull market in bonds. Bond yields have been going down since '81. But they seemed to hit bottom near the end of 2008. What we're seeing now - possibly - is the beginning of the long march in the other direction. This seemed even more likely because at the end of March the Bernanke Fed lost one of its pumps. It can no longer buy up the toxic mortgage- backed bonds of Wall Street, thereby giving the banks money to buy US Treasury debt. Still, on Wednesday, threats of more trouble from Greece sent investors towards US bonds for safety. "Greece Rescue Not Going According to Plan," was the headline at Bloomberg. "Demand strong in US 10-year Treasury debt sale," reported The Financial Times. But by yesterday, it looked like the plan for US debt was not going well either. "Treasuries decline after $13 billion auction of 30-year bonds," said another Bloomberg report. Jobless claims unexpectedly rose last week. What do you expect? This is a Great Correction. Learn to love it. "China offers high-speed rail to California," says The New York Times. Get used to that too. Who's got the money? Who's got the new technology? Who's got the engineers...the people who actually know how to do something. Hey China...let's make a trade. We'll give you 1 million lawyers for 100,000 engineers. Or, how about 20,000 lobbyists for one good metallurgist? Heck...we'll throw in 535 members of Congress. Hold the Congressmen? Okay...guess we're stuck with them. 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