More Government Stimulus and More Debt

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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The future of U.S. fiscal policy can be seen in Japan today. The Japanese government announced on December 8th a new $81 billion stimulus package to prop up their sagging economy. This is only the latest of a long string of stimulus measures that have been enacted since the early 1990s. All of them worked for only a short time and then had to be followed up by new stimulus measures. The same day, President Obama was announcing a new job creating stimulus package for the U.S., even though the U.S. economy is supposedly already in recovery and the December jobs report indicated an improved employment picture. Investors should keep in mind that action speaks louder than words (and questionable statistics).

The latest Japanese stimulus package will be used to prop up regional economies, for public works projects (a perennial favorite of their failed stimulus packages for more than 15 years), for energy efficiency initiatives and loan guarantees for small businesses. In contrast, the Obama plan will focus on helping small businesses, energy efficiency initiatives, and public works projects involving transportation infrastructure. Looks like a copy of the Japanese approach to me. The idea is to pay for it with $200 billion of unused TARP funds. The only impediment to that is that the original bill specified that this money should be used for reducing the U.S. budget deficit. The Obama administration clearly has no intention of doing this and the implications for an already out of control budget deficit and spiraling U.S. national debt are clear.

The Japanese were once fiscally responsible, but that ended long ago with the failure of their banking system in the early 1990s. The picture in the U.S. for 2007 and 2008 is quite similar - in regard to the banking failures that is, not the fiscal responsibility. Despite an almost endless succession of stimulus plans, the economy has fallen into recession over and over again. This should be thought of as the modern Keynesian version of a depression. The cost of all the government programs has been tremendous. The ratio of public debt to GDP in Japan is estimated by the IMF (International Monetary Fund) to be 218% this year. This is the highest by far of the top economies. It is expected to rise to 246% by 2014. The Japanese budget deficit this year is expected to exceed tax revenue. They have only managed to get away with this by keeping interest rates close to zero for more than a decade. Time is running out for them however. They are already engaging in money printing to pay for government operations and this will eventually turn their long running deflation into a very serious inflation problem.

The U.S. which is at the earlier end of the 'banking crisis with never ending bailouts' curve currently has a public debt to GDP ratio that is supposedly only 83% (if you adjusted the official government GDP numbers to something more realistic, it would be 110% or more). The budget deficit in fiscal 2009 was $1.42 trillion - and that was considered good because it was less than expected. The national debt increased by $1.9 trillion however. Intergovernmental transfers and off-balance sheet items account for the discrepancy. The U.S. national debt is now over $12 trillion and rising rapidly. Keeping short-term interest rates close to zero allows this to continue since 44% of the debt is funded with bills of one-year duration or less. An examination of the 2010 U.S. federal budgets shows that 40% of the funding is expected to come from borrowing. Money printing would be included in the borrowing category.

There are worries in the Eurozone about Portugal because it expected to have a public debt to GDP ratio of 90% by 2011. The official U.S. numbers could be just as bad (the actual ones much worse). As the largest economy in the world and the issuer of the world's reserve currency, the U.S. has a lot more leeway in fiscal irresponsibility. The limits of that leeway will probably be revealed in the next few years in Japan.

Disclosure: Not relevant.

NEXT: Is the Gold Correction Over

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

U.S. Interest Rates Go Negative Again

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

At one point on November 19th, the yield on a new 3-month T-bill fell to 0.005%. A rational person would think you couldn't go lower than that, but a rational person would be wrong. The yield on 3-month bills maturing in January 2010 briefly turned negative. This was not the first time in recent history. It happened last year on December 9th, 2008 at the bottom of the Credit Crisis - or at least what has perceived to be the bottom so far. A 3-month T-bill auction on that date had a high bid equivalent of 0.000%. Apparently not everyone got in at that great rate.

Interest rates below zero are theoretically impossible. After all why not just keep the cash instead of settling for less money after a period of time? They do happen in the real world however and are an indication of extreme risk aversion on the part of banks. They are a marker of severe financial crisis. Before the current Credit Crisis, T-bill yields were only negative in the U.S. in 1940, after years of financial stress from the Great Depression. The auction low for T-bills was 0.01% in January of that year. Rates apparently went negative because of punitive property taxes imposed by a number of U.S. states. T-bills were not taxable and investors kept more of their money by taking a slight loss on T-bills than if they had paid the tax. No such special circumstances exist today to justify negative interest rates. The explanation for current negative rates is that banks are loading up on short term government instruments to improve the appearance of their year-end balance sheets.

Negative interest rates also took place in Japan during their current 19-year (and counting) financial debacle. Short-term interbank lending had a negative return one weekend in January 2003. As was the case in the U.S. during 1940, years of severe financial stress preceded this event. In Japan's case there were a series of rolling recessions - the modern version of depression thanks to government's now common practice of continual economic stimulus programs. There have been other cases of negative interest rates, however these seem to have been utilized (usually officially by the government) as a type of currency control. Switzerland imposed negative interest rates during 1970s after years of appreciation of the franc for instance, but only for foreign depositors.

The appearance of negative interest rates after a long period of financial stress raises the question of when economic problems actually began in the United States. It is reasonable to assume that they started long before the awareness of the Credit Crisis in 2007. Interest rate anomalies may have in fact already existed in 2003. While it is not generally known, between August to November some U.S. government repurchase agreements had negative rates. There is more than enough evidence to indicate that recessionary period actually began in the U.S. in 2000. Manipulated inflation rates and GDP calculations hid the details from the public. The U.S. government, businesses, and consumers lived off ever-increasing borrowing which made up for declining income. The Credit Crisis was merely the unraveling of this scheme, not when the financial problems started. The return of negative rate indicates a deeply entrenched problem within the U.S. financial system - and it doesn't look like it has been fixed yet.

Disclosure: No position in T-bills.

NEXT: For Gold, Overbought Means Overgood

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Five Year Lows are Bad, Eleven Year Lows are Worse

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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On Wednesday the Dow hit a five year low. Yesterday the S&P500 broke its key long term support around 775 to hit an eleven year low. The import of this event should not be underestimated. The market sell off that began in the spring of 2000 and which first ended after two and a half years has now been extended to eight and a half years - at least for the S&P500. The Dow and Nasdaq have still not broken their 2002 lows, but the Dow is close to doing so and this would represent another violation of key support that would have ugly implicatons for future stock prices. The Nasdaq is holding well above this support level, but this provides scant comfort considering that that this represents an approximately 78% drop from its 2000 high.

The market statistics for this year alone are already devastating enough. After Thursday's drop the Dow Jones is down 43%, the S&P 500 49% and the Nasdaq 50% in less than eleven months. The S&P's drop matches the one that took two entire years in the crushing market sell off in 1973/74. As of now, it is worse than the 47% drop in 1931 - the year with the biggest drop in stock prices during the Great Depression. All the U.S. indicies had crash level drops once again yesterday, but in an unusal pattern the S&P fell the most with a 6.7% loss and the Nasdaq the least with a 5.1% drop. For the record the closing prices were 7552 on the Dow, 752 on the S&P 500, 1316 on the Nasdaq and 385 on the Russell 2000.

Financial stocks bore the brunt of the selling with Citigroup losing 24% after a 23% loss the day before. Citi closed at 4.71 even after (or possibly because) Saudi prince Al-Waleed said he would raise his stake in the bank back to 5% (this was the amount he has held for many years and if he has to buy to get back to this level, he has obviously been selling recently). Citi announced this morning that it was considering auctioning off the firm in parts or selling itself wholesale. It also requested the SEC ban short selling on its stock again. JP Morgan was damaged almost as much as Citi, with a 18% decline and Bank America did a little better dropping only 14%. GE was down 11%. Morgan Stanley and Goldman fell 10% and 6% respectively. While Goldman did a little better at the close, its intraday low at 49.00 was a much bigger drop. Morgan Stanley fell back into the single digits. So much for TARP, the Wall Street welfare bill, that was supposed to save the financial system from a meltdown.

Wiffs of panic in the financial system were palpable yesterday. The VIX (the volatility index) closed over 80. Interest rates on 3-month T-bills fell to 0.1% in flight to safety buying. A little better than the brief negative interest rate on the 1-month T-bill reached awhile ago, but not by much. Oil continued its relentless decline, falling to $49.42 a barrell. Weekly jobless claims spiked to a 16 year high of 542,000, with continuing claims the highest since 1982 (less than half of employed workers in the U.S. are eligible for unemployment by the way, so you may want to double all numbers to get a more realistic picture of the U.S. employment situation). One market commentator ventured that the current slowdown could be the "worse since the Great Depression". Perhaps he should have used the word than.

NEXT: The Citi that Should be Put to Sleep

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

When the Lender of Last Resort Becomes the Only Resort

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

In the current credit crisis, central banks and governments in the U.S. and Europe are making the transition from supporting the financial system to becoming the financial system. There seems to be no ruined financial company that governments won't bail out (at least if its large enough or if the impact of its failure would have some significance), nor any limit to the amount of money that central banks will lend. The complete dependency relationship on governments that now exists among financial institutions is the ultimate outcome of Moral Hazard - banks have repeatedly been bailed out in the past, so they take on greater and greater risks until a total systemic failure takes place requiring a government takeover.

The latest bank bailouts include UBS last week and ING this weekend. After UBS declared a surprise profit, the Swiss government announced it would be injecting up to $60 billion into the bank and would get a 9% stake in return (apparently the Swiss government doesn't even believe their accounting figures). The UBS bailout was predicted long ago by the New York Investing meetup. The Dutch government today announced it would be giving ING Groep NV $13.4 billion in exchange for non-voting preferred stock, but would nevertheless be getting two seats on the board. Yesterday, the Korean government announced a blanket $100 billion backing for its bank's foreign currency debts.

As for cash injections into the financial system, these hit a record last week in the U.S. with banks and dealers direct borrowing from the Fed reaching $438 billion per day. This was up from the $420 billion per day the week before. The only Fed program that had less lending last week was the one that allows banks to purchase asset backed securities ($123 billion versus $139 billion the previous week). The U.S. Treasury sold $499 billion in T-bills for the Fed's Supplementary Finance Account to support all of this lending. Meanwhile, the Bank of England started implementing a new framework to provide emergency funds to banks. The new facility cuts the penalty for banks borrowing funds directly from it overnight. Why go elsewhere under those conditions? Ditto in the U.S. where funds from the Fed are plentiful and cheaper than can be gotten elsewhere.

If only one government was engaging in increased lending, a case could be made that it could borrow the money from other more financially sound countries. However, in the current crisis, all the developed countries are increasing available funds substantially. They do so by selling bonds. But if everyone is selling more bonds, who's left to buy them? Only an increase in the supply of the world's major currencies can make this possible, which means they are all being devalued in this crisis. By how much, only time will tell.

NEXT: The Fed Should Be Careful What It Wishes For

Daryl Montgomery

Organizer, New York Investing meetup

http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.