Sunday, January 24, 2010

January 24 2010: The State of the Union? Honestly?


Dorothea Lange Family Vehicle July 1937 "Sharecropper family near Hazlehurst, Georgia"

Ilargi: State of the Union on Wednesday. Bernanke re-confirmation decision sometime this week (his term ends January 31). Paul Volcker in a new and prominent role. The stock markets showing substantial losses in the past week. Looks like these might be make or break days for the administration.

It may be too late to get rid of Bernanke, but there's no guarantee that he can see eye to eye with Volcker. The main problem may be to find replacements for both Bernanke and Geithner. Politically these would seem positive moves, if they are executed well, but then again Obama doesn't need the blame if their firings lead to plummeting markets. And who could possibly fill any of the two spots? Everyone Wall Street is tainted, certainly with "populism" the new US buzz word. Sleepless nights all around.

And besides, nobody should be fooled into thinking that the "Volcker Rule" brings any relief from the mess we're in. It's nice to theorize about how banks should function in the future, and it may make for a few good headlines, but the problems that count are here today, not tomorrow. Nothing has been done to tackle those problems, and very little has been proposed to do so.

Unemployment is still rising. Initial jobless claims were up last week. Continuing claims were 5.99 million, from 4.58 million last year. 5.65 million persons claiming Emergency Unemployment Compensation benefits for the week ending January 2, from 2.09 million a year ago. But the White House still engages in creative accounting. White House Press Secretary Robert Gibbs said on "Fox News Sunday:

"Just last quarter, we finally saw the first positive economic job growth in more than a year, largely as a result of the recovery plan that's put money back into our economy, that saved or created 1.5 million jobs," Gibbs said.

Late last year they claimed some 650,000 created or saved jobs, and we don’t need to repeat how they got to that total. Now it’s a lot more all of a sudden. Creative counting.

Undoubtedly, Obama will spend a lot of time talking about jobs on Wednesday. And it’ll all sound great. But one week after that speech, the BLS is set to add 824,000 lost jobs to the total tally, which will lift the U3 number eerily close to 11%. So what can Washington do? The only thing in sight seems to be a flood of additional spending, and the new populist climate may not like that very much. Also, the US is already on course to hugely increase its debt, so much so that it's not clear that -or how- it will actually manage to sell it. The New York Times' Floyd Norris reminds us once more that China is not likely to buy much of it.:

Debt Burden Now Rests More on U.S. Shoulders

The United States Treasury estimated this week that during the first 11 months of last year China raised its holdings of Treasury securities by just $62 billion. That was less than 5 percent of the money the Treasury had to raise. That raised its holdings to $790 billion, leaving it the largest foreign holder of Treasury securities — Japan is second at $757 billion and Britain a distant third at $278 billion. But China’s holdings at the end of November were lower than they were at the end of July.

Not since 2001, when China was still a relatively minor investor in Treasury securities, had the country shown a decline in holdings over a six-month period. During the full year of 2009, the volume of outstanding Treasury securities owned by the public — as opposed to United States government agencies like the Federal Reserve or the Social Security Administration — rose by $1.4 trillion, a 23 percent gain, to $7.8 trillion. In dollar terms, that was the largest annual increase ever, but as a percentage increase it slightly trailed 2008. With this week’s release of the November estimate of foreign holdings, China is on course to lend just 4.6 percent of the money the government raised during the year. That compared with 20.2 percent in 2008 and a peak of 47.4 percent in 2006.

While Forbes Magazine has the following perspective:

The Global Debt Bomb

National governments will issue an estimated $4.5 trillion in debt this year, almost triple the average for mature economies over the preceding five years. The U.S. has allowed the total federal debt (including debt held by government agencies, like the Social Security fund) to balloon by 50% since 2006 to $12.3 trillion. The pain of repayment is not yet being felt, because interest rates are so low--close to 0% on short-term Treasury bills. Someday those rates are going to rise. Then the taxpayer will have the devil to pay.

Kyle Bass’ Hayman Advisors estimate that 45% of the $4.5 trillion in sovereign debt to be issued in 2010, or $2.025 trillion, will be American. Multiple voices have expressed grave doubts about the true identity of the buyers of US debt. There are serious suspicions that most of it has anonymously been bought by the Federal Reserve, simply for lack of other buyers. And that would mean the country buys its own debt, presumably in an effort to keep Treasuries attractive internationally.

In 2010, sovereign debt issued globally by mature economies will be three times what it on average was over the past 5 years. And the Federal Reserve has pledged to stop buying in a few months. It may skirt on that one a bit, but it can’t’ buy forever. Someone's going to find out.

Add to that that about half of all US states have unemployment funds that are broke, and need to borrow from the federal government to pay out benefits. Half of all states are functionally broke overall, I'd venture, but that's my guess. Los Angeles is the first major city -in this round- that talks about bankruptcy, which means many more are in similar straits. Their only recourse? Sell debt, sell bonds, or sell their possessions.

And still, the biggest political gains are seen in plans to make banks change the way they operate. That's the horse and the barn door in all their classic glory. Looking at all those trillions in debt, and all those millions without jobs, wouldn't it be time to dig in and handle the present problems first? If you don't, you run a bigger than life size risk that a few years from now, nobody could care less how a bank operates, either because they have no money to speak of (the vast majority), or because a bank would be the last place they'd put their money in.

Bailing out banks so the economy won't crash may seem to make sense at first sight, but if the economy crashes regardless, weren't those bail-outs futile? Or could you maybe even have saved the economy with the money spent on bank bail-outs? The losses that led to all this are still there, and it’s high time, or way past it, really, to see what they add up to.

And while you're at it, let's bring down the prices of those ridiculously overvalued American homes. All you need to do is take off your hands, and it'll happen like magic. Just see who offers what in a free market. But I wouldn’t want to make that choice either, because we all know who would offer what. By now it's heads you lose, tails you die, all over again. A whole year wasted with spending other people's money. Wait till they figure that one out.

The president's song won't change, though. On Wednesday, it’ll be "accentuate the positive, eliminate the negative, and don't mess with mister in-between". Or, in the words of Robert Gibbs again:

If you look at where we have gone, from losing 741,000 jobs to on the verge of creating more jobs, we've made a tremendous amount of progress.

That's the spirit! And it only cost $1 trillion per month, give or take a bonus round or two. Now if we only keep doing that for the foreseeable future, we should be just fine.

The State of the Union? Honestly?

* Some 5 million more people claim unemployment benefits than a year ago. How many more have fallen off the steep end, we simply don’t know. Job creation programs so far have been utter failures, no matter what Gibbs says. Or Obama. It's just never been a priority. The banking system has.
* 3 million homeowners lost their houses (and then there's their families). And millions more are sure to follow.
* Bankers will receive record bonuses. And the government does nothing to stop that, even though it owns large portions of the banks.
* The federal debt has increased by trillions of dollars, which we unfortunately can’t count because the government conspires to keep the data secret. Is it $12 trillion, or $23.7 trillion?

The State of the Union? Let’s say, hypothetically, that the stock markets give back the gains they've made since March 2009 over the next few months. About $6 trillion dollars worth of them, I’m told, in the US alone. What effect do you think that would have? What if the losses kept growing after that? How many companies would that bankrupt? How many investors? What state would that leave the union in?

And yes, you do have to budget for that possibility, it really is that simple. A union that has no plan B will always be driven to lie about its true state, no matter what state it's in.

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