We Have A Few Years To Get Our Fiscal House In Order Or We Go Into A Depression

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Americans’ Mistrust of Govt. Is Rational and Warranted, But Also Dangerous”

The United States invariably does the right thing, after having exhausted every other alternative,” Winston Churchill once said.The problem is “we’re in the process of exhausting all the alternatives pretty quickly,” says William Galston, a senior fellow at the Brookings Institution.A recent CBS/NY Times poll showed only 19% of respondents say they trust the government “to do what is right all or most of the time,” while 78% believed the government is run by special interests, not for the benefit of the people.”If current levels of trust don’t improve, I don’t see how Americans can be persuaded to make sacrifices now for a better future,” says Galston, a former adviser to President Bill Clinton. “We have a few years to get our fiscal house in order before things really get out of control in ways that will be hard to reel back – the early signs are not encouraging.”With public deficits soaring and stratospheric bailouts for banks and automakers,Galston isn’t saying mistrust of government is irrational or unwarranted, but it is dangerous for society.”Unless it’s corrected we’re going to have a very hard time doing what needs to be done in the next decade or two,” he said. “So I hope we’re on the threshold of doing the right thing, not because we want to but because we have to. “

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7 Good Reasons Why The Dollar Will Fall and Gold Rise

It’s time to provide some fundamental reasons as to why the dollar is in trouble long term and why the precious metals sector and the commodities sector stands to benefit from these dollar woes.

  1. The US has a massive current account deficit and it only seems to be getting bigger. Economists may play with the numbers by stating that one month is less than the other and so forth, but the trend is up. It now comes close to 6% of our total economic activity.
  2. The US needs to attract a whopping 1.8 billion dollars a day to compensate for the current account gap. This trend is simply unsustainable.
  3. While Government officials talk big about a strong dollar policy, they actually favour a weak dollar. This serves two purposes, it helps increase exports and it allows the government to pay its debt with lower valued dollars. As long as the Government continues to borrow at these mind boggling rates, it is going to unofficially favour a weak dollar.
  4. By inflating the money supply, the government is imposing a nefarious silent killer tax on the masses. The only way to hedge against this outright theft is to hedge yourself by getting into hard assets (precious metals, lumber, oil, etc).
  5. Our national debt is 12.4 trillion and increasing. However, this does not take into consideration all our unfunded liabilities such as Social Security and Medicare. If these are combined, the debt levels soar to well unimaginable levels.
  6. 44 states are facing budget shortfalls. California is leading the way as it is expected to spend 50% more than it will generate this year. Now that is a really scary thought. Since 2007 US states have collectively spent 300 billion more than they have generated. These deficits mean higher taxes and so far 33 states have raised taxes, but collections have plummeted to their worst levels in 46 years; you cannot squeeze water out of a rock. No jobs means no revenues but states are selling new bonds at record rates to raise funds. It’s a recipe for long term disaster.
  7. Eventually the Fed is going to have to raise rates to continue attracting the huge amounts of money it needs to function. Overseas investors are going to start demanding higher rates. Higher rates will kill this fragile economy. Precious metals thrive in a high interest rate environment. From a long term perspective the bull market in precious metals has only just begun.
About the author: Sol Palha

Joseph Stiglitz says, “We are headed for another crisis without reform”

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Paul Krugman says, We’ll be Repeating the Great Mistake of 1937

Paul Krugman

Paul Krugman

That 1937 Feeling

Published: January 3, 2010

Here’s what’s coming in economic news:  The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.

But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.

This shouldn’t be happening. Both Ben Bernanke, the Fed chairman, and Christina Romer, who heads President Obama’s Council of Economic Advisers, are scholars of the Great Depression. Ms. Romer has warned explicitly against re-enacting the events of 1937. But those who remember the past sometimes repeat it anyway.

As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.

And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade.

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Which brings us to the still grim fundamentals of the economic situation.

During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers — who are $11 trillion poorer than they were before the housing bust — are in no position to return to the buy-now-save-never habits of yore.

What’s left? A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.

Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.

So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery. But will policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are.

The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That’s far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done — and the illusory good numbers we’re about to see will probably head off any further possibility of action.

Meanwhile, all the talk at the Fed is about the need for an “exit strategy” from its efforts to support the economy. One of those efforts, purchases of long-term U.S. government debt, has already come to an end. It’s widely expected that another, purchases of mortgage-backed securities, will end in a few months. This amounts to a monetary tightening, even if the Fed doesn’t raise interest rates directly — and there’s a lot of pressure on Mr. Bernanke to do that too.

Will the Fed realize, before it’s too late, that the job of fighting the slump isn’t finished? Will Congress do the same? If they don’t, 2010 will be a year that began in false economic hope and ended in grief.

Are We On The Verge Of Total Global Economic Collapse?

Are we on the verge of total economic collapse?Don’t laugh. The french firm Societe Generale thinks so.The brokerage firm has put the fear of God in clients recently by predicting that developed economies and markets are going to collapse under a monster debt load and that gold is going to soar to $6,000 an ounce.Fortunately, not everyone feels that way. Many on Wall Street, in fact, have suddenly gotten quite bullish after missing a lot of the extraordinary 65% rally we’ve had since the lows of March. Hopefully, these folks–the “V-shaped recovery” crowd–are right, and the bad news of the last couple of years will soon be a distant memory.Aaron and I are skeptical, though. The aftermath of debt-fueled financial crises like the one we went through usually lasts for many years, if not decades. Japan has been struggling to right its ship since its own bubble burst in 1990, and the country still isn’t growing strongly again. (Japan’s stock market, meanwhile, trades at a fifth of its 1989 high).With luck, we won’t end up like Japan–or the SocGen scenario. We doubt, however, that the economy and markets will just shrug off the last year as if nothing serious happened.If you’re curious, you can see highlights of the SocGen report here:SocGen: Prepare Yourself For the Worst Case Scenario

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A Big Crisis is Coming with America’s Weak Dollar Policy

The Dollar Index hit yet another 14-month low early Monday after a Chinese central bank official urged the PRC to diversify its reserves into more euro and yen. A stronger-than-expected GDP report in South Korea also put pressure on the greenback as traders expect other central banks to follow Australia’s lead and raise rates while the Fed stands pat.”The dollar is a significant concern,” says Leo Tilman, president of L.M. Tilman & Co. and author of Financial Darwinism.” You can envision all sorts of crises scenarios where rest of the world stops buying U.S. assets because of the dollar [and] you have higher interest rates and all sorts of recessionary pressures.”With the U.S. Treasury set to auction a record $123 billion of notes this week and the Fed’s $300 billion Treasury purchase program set to expire, those risks should not be taken lightly. Of course, such concerns have been circulating for a while and have not come to fruition, to date.It’s “very difficult to say” when foreigners stop talking about diversifying away from the dollar and take more concerted action, Tilman admits. But “it’s hard to imagine a lot of foreign buyers are going to tolerate further declines in the dollar. “Tilman, whose firm advises institutions on strategic risk management, says the day of reckoning is likely to come within the next year.”A lot depends on how sustainable the recovery in the U.S. is: If the Fed has an ability to start hiking IR, that will mitigate some of the pressures on the dollar,” he says. “But if we see rest of the world starts hiking rates and the Fed lagging behind because the U.S. economy is so fragile, that will be the breaking point. We’re taking the second or third quarter of next year.”

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Here We Are Again – We Reached Dow 10,000 in March of 1999

Peter Boockvar, equity strategist at Miller Tabak, points out a lot has changed since the Dow first broke the magical 10,000 barrier in March of 1999.  While most other assets have gained value, the Dow is stuck in the mud.  Worse yet, we’re not even close to break even if you factor in the fact the dollar has lost 25% of its value in the last 10 years, based on the Dollar Index.

Here’s some of Boockvar’s other sobering stats comparing today vs. the first time the Dow cracked 10,000:

  • Total US debt was $24.6T vs $50.8T today.
  • The CRB commodity index was at 192.40. Today, it stands at 269
  • Gold was at $280. Now, it’s hitting all-time highs above $1,060 per ounce.
  • A barrel of crude oil was $16.44, today it cracked $75.