Job Growth Missing In Action

Jobless claims staying over 500,000 may cause more worry about economic recovery turning into a double-dip recession. While the crowd has been conditioned to expect extreme outcomes due to recent events, we should be careful not to be overly pessimistic or optimistic says James Picerno. See the following article from The Capital Spectator.

The danger is not the past, but the future.

Today’s update on weekly jobless claims may be the warning sign. New filings for jobless benefits were unchanged last week, hovering at 505,000, matching the previous week’s tally. Although this number is down sharply from it’s recessionary peak of 674,000, set back in late-March, 500k reflects distress in the labor market. In other words, job growth is largely MIA.

It’s too soon to tell if the drop in claims is stalling. But there’s a case to be made that the big, easy reductions are behind us. As we discussed many times this year, there was always a strong case that a snapback on multiple economic and financial levels was in the offing for 2009. Unless the system was truly headed for a collapse, the natural order of the business cycle was righting itself after such a sharp deviation from equilibrium. In short, much of the events in 2009, particularly since the spring, aren’t a huge surprise to students of economic history. But the world is likely to become increasingly nuanced and complicated, and not necessarily for the better.



We’ve commented often in 2009 that the main threat was a stalled rebound in the job market. The risk was less about a double dip recession and another cataclysm and more of meager growth in the all-important labor market. Today’s data point in jobless claims isn’t proof that our forecast is turning into reality, but neither does the latest number do anything to dispel our worry of what may be looming.

The crowd’s been taught to expect that extreme outcomes are the new norm, courtesy of the drama of the past year or so. But we think the hazards will come quietly, softly, sneaking up on us like burglars in the night. Rising inflation, weak job growth, a tepid recovery, and the increasing pain that comes with servicing the debt boom of the past generation all conspire to make the foreseeable future challenging.

None of these problems will change very much over any given period. Nor will the associated fallout appear materially worse from month to month or even quarter to quarter. That raises the possibility that the dangers will be ignored or underestimated, which in turn suggests that the crowd may adopt a degree of optimism that’s unwarranted.

But the chickens are coming home to roost, one seemingly inconspicuous and unthreatening data point at a time. Still, there's a danger in becoming too pessimistic as well. The excess will be worked off and progress will come. But it won't be quick or easy this time. And for some with limited patience, it'll be far too slow. Regardless, the future can't be rushed. That's always true, of course, although in the months and quarters ahead this truism will resonate on a deeper level than we've witnessed in many a moon.

This post has been republished from James Picerno's blog, The Capital Spectator.

Mortgage Delinquencies Reach Frightening New Record

One area of the economy that isn't improving is foreclosures which are not expected to peak until 2011 by some estimates. More bad news is that delinquencies have reached a new record with nearly 10% of home mortgages behind by at least one payment. See the following post from Expected Returns.

As I've expected for months now, 'green shoots' are wilting before our very eyes. I've never heard of a recovery characterized by rising unemployment, record foreclosures, collapsing consumer credit, and falling consumer confidence, but hey, maybe we're in a new paradigm. From the New York Times, U.S. mortgage delinquencies reach a record high:

Nearly one in 10 homeowners with mortgages were at least one payment behind in the third quarter, the Mortgage Bankers Association said Thursday.

That is the highest figure since the association began keeping records in 1972. It is up from about one in 14 mortgage holders in the third quarter of 2008.

“Clearly the results are being driven by changes in employment,” Jay Brinkmann, the association’s chief economist, said on a conference call with reporters. Five million more unemployed people over the last year has turned into about two million more overdue loans, he added.

This is what I mean when I say unemployment is a leading indicator for this particular downturn. You just can't compare this recession with previous recessions when this crisis was preceded by parabolic rises in housing prices and household debt levels. This is a debt crisis pure and simple. Debt crises, especially one of our magnitude, do not disappear after 2 years.

The association’s delinquency numbers do not include those who are actually in foreclosure, a figure that also rose sharply, to 4.47 percent of all loans. A year ago, it was 2.97 percent.

It also indicates that foreclosures, instead of peaking with the unemployment rate next year, will be a lagging indicator. The association expects foreclosures to peak in 2011.

The data indicate that borrowers in trouble are no longer just those who took out subprime loans. High-quality prime fixed-rate mortgages now represent the largest share of new foreclosures.

If everyone agrees that the sky was falling last year, and that we were on the brink of another "Great Depression", what do you call it when foreclosures are up 50% from those "depression" levels? In the lexicon of our leaders, it is called economic recovery.

I've mentioned previously that the next threat to residential housing is in the higher-end markets. There is another wave of delinquencies set to hit the market in 2010, and if the Fed loses control over interest rates, look out below. Here is a chart of the coming Option ARM and Prime resets in 2010 and beyond. Get ready for fireworks.


This post has been republished from Moses Kim's blog, Expected Returns.

Obama Changes His Tune On Deficit

After campaigning for and signing into effect more than $800 billion in federal stimulus, President Obama now is worried that too much debt could create a double-dip recession and recently spoke out against deficit spending. Although the federal stimulus package delivered limited and underwhelming job growth results, Democrats in Congress are already at work on a second package targeted at spurring job growth – one that will likely result in more deficit spending. See the following from The Street.

President Obama, the champion of stimulus spending, is suddenly worried about an overload of government debt.

After pressing Congress to approve an $800 billion package of infrastructure projects, unemployment benefits and tax cuts during his first month in office, Obama is now warning that too much debt could cause a double-dip recession.

Even more intriguing about this shift in rhetoric is that he chose to deliver the new message to Fox News, News Corp. (NWS Quote) network with which Obama has been feuding over a perceived conservative bias.

One can only assume that the detente with Fox and the decision to talk about debt issues is a politically calculated move to assuage Republicans who have been making deficit spending a centerpiece of their resistance to Obama's many initiatives, in particular health care reform.

Obama also acknowledged that he's in a precarious position in terms of boosting job creation to keep the recovery going while reinstating some fiscal discipline.

In the same interview with Fox, Obama talked about the need for new measures to spur companies to create jobs. Obama's Democratic Party chiefs in Congress are in fact working on new legislation they hope will bring down the unemployment rate from the staggering 10.2% level. Any government-sponsored initiatives along those lines will add to the deficit one way or another.

It's essentially an admission of failure that Democrats are now working on a second job-creation package.

So far, the stimulus spending isn't showing great results. At the end of October, the Obama administration released a report showing that about 650,000 jobs had been saved or created at a cost of $150 billion. That's about $230,000 per job.

I'm not knocking Obama or the Democrats for trying to stoke the economic recovery, for the trillions of dollars spent to bailout the financial industry or for realizing that they may need to do more to help the 15 million unemployed Americans find new jobs.

It's just the idea that Obama is now critical of deficit spending that I find so ironic.

This post has been republished from The Street, an investment news and analysis site.

Obama Wrong About Deficits Causing A Double-Dip Recession

Mark Thoma discusses why Obama is wrong about the deficit causing a double-dip recession. While he may be trying to reassure China about their US dollar concerns, a premature attempt to balance the budget before the economy is fully recovered is more likely to lead to a second recession. See the following post from Economist's View.

Edward Harrison catches this quote from Obama:

The president is in Beijing as part of his tour through several Asian countries to address economic challenges. He spoke candidly about the precarious balancing act his administration is trying to perform. He wants to spend money to kick-start the economy, but at the same time is in danger of creating too much red ink.

Obama warned the United States' climbing national debt could drag the country into a "double-dip recession," though he said he's still considering additional tax incentives for businesses to reverse the rising unemployment rate.

"There may be some tax provisions that can encourage businesses to hire sooner rather than sitting on the sidelines. So we're taking a look at those," Obama told Fox News' Major Garrett.

"I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession."

I hope his economic advisers set him straight, though I suppose there's a chance that this nonsense is coming from them. We needed a larger stimulus package to begin with, and the economy could still use more help, labor markets in particular.

Let's hope that this doesn't turn into a call to actually start balancing the budget before the economy has fully recovered as that would increase the chances of the double dip recession that he is so worried about (something we should have learned from the 1937-38 experience where an attempt to balance the budget prematurely plunged the economy back into recession).

These comments also make it sound like any jobs program, if we get one at all, will be limited to (right-wing approved) tax cuts which is, in my opinion, inferior to direct job creation strategies. Tax cuts can be part of the mix, but by themselves are unlikely to do enough to solve the employment problem.

This post has been republished from Mark Thoma's blog, Economist's View.

Why Gold Bubble Advocates Could Be Wrong

Gold has risen to an unprecedented $1140, causing some to conclude the market is a bubble about to burst. Moses Kim makes a case for resisting the urge to short gold as political tensions, particularly class conflict and concerns over taxation, will cause instability, volatility, and an increased demand for the security offered by gold. See the following post from Expected Returns.

That is, if you want to survive as a trader. Anyone who has been trading actively for a reasonable period of time knows that gold and silver move to their own unique rhythm, and that shorting gold over the past decade has been a losing proposition. I know there are many investors "dollar cost averaging" their short positions in gold, praying for a correction that never comes. The formula for making money in this bull market is simple: buy the dips and sell the rips.

I am amazed at the total change in sentiment from investors towards the gold market. Just watch how investors react to any pullback in gold; my guess is that all dips will be bought aggressively. The pattern over the course of this bull market has been clear: a multi-month consolidation followed by a huge breakout. We haven't come close to going parabolic yet, and until we do, this bull market is well intact and is not at bubble levels. Keep your television tuned in to CNBC so you can do exactly the opposite of what they are recommending. Currently CNBC is telling you to sell gold because it is a clear bubble- this means you should be buying.

Anyway, what is $1140 gold telling us? I'll try to give you an idea of my thought process when I invest, which is heavily dependent on politics.

Political and Economic Dislocations Ahead

If you study history, you realize that the majority of truly seminal events happen in the shortest span of time. While most people are stuck in the mindset that events move in a predictable, steady, linear manner, what's actually happening right now politically, economically, and socially are huge changes that will affect the lives of everyone globally. Political tensions will likely escalate in the coming years, and there will be a sudden change in global dynamics. The catalysts for major events will only be obvious to most people in hindsight. The job of the successful investor, however, is to understand how current actions dynamically influence future events. This allows you to foresee events and to adjust investment decisions accordingly.

Class Warfare, Increased Taxation= Recipe for Disaster

It's not surprising, but class warfare is already beginning in America, as politicians try to enforce equality on the population. If your company can't compete globally, don't worry, Uncle Sam will be there to take capital away from productive individuals and funnel it to unproductive companies. State taxes are already rising for the "rich", and as a result, capital will flow out of the U.S. More than people realize, capital flows have an enormous effect on the growth of economies. Further, as unemployment benefits get extended once again, jobs remain scarce, and "too big to fail" becomes the official mantra of government, we are developing an economic model that is more socialist than capitalist. We will learn once again that enforced equality is contrary to the idea of freedom, both economic and political, and that economic growth will suffer as a result. Why is this important as an investor?

Likely Government Responses to Insolvency

Lets look at the range of possible actions the U.S. government will undertake to stay solvent and delay the inevitable path to bankruptcy. If I were a greedy politician, where would I look to confiscate wealth? Besides gold, which acts as a check against government ineptitude, I would be looking at 401k's. Just look at what the government has done with the Social Security "Trust Fund"? It has replaced money taxed from the population and replaced it with worthless government IOU's. I wouldn't be surprised in the least if 401k's were replaced with U.S. Treasuries, all in the name of stabilizing portfolios. Of course this will be a smokescreen for criminal confiscation of the hard-earned wealth of Americans, but what about the handling of this crisis hasn't been criminal under the surface? The point of my little rant is this: eliminate counterparty risk, especially if you are approaching retirement. If you own a 401k, you are a sitting duck in my opinion.

What's the other option? Inflation. This form of confiscation is obviously much harder to escape. Most lower and middle class Americans will understand the curious feeling that standards of living are going down even in the midst of supposed growth in our economy. The idea that our government would purposely manipulate economic statistics to further their agenda is, surprisingly, repugnant to some people. The truth is, government statistics misrepresent the true state of our economy, which should be obvious to anyone who actually thinks. Why do we need such tremendous stimulus if our economy is recovering? Use your common sense and don't buy into flawed Keynesian propaganda.

My point is that in a time of total disregard for the rule of law and an ad hoc approach to administering justice, the free market just can not operate. This is incredibly bearish for our economy. Why do you think so much money is flowing to gold? You never know when the government will do something truly nutty like ban short-selling or impose ridiculous taxes on capital gains. People are buying equities in the short term, but I don't think anyone in their right mind believes equities are undervalued. Everyone has two hands on the exit.

What is Gold Telling Us?

A move to $1500-$2000 gold, especially in the next year, is a frightening possibility. Don't expect business as usual with gold at those valuations. I have repeatedly stated that gold is a purveyor of truth in a time of lies. You have heard our government officials talk about a "strong dollar policy" for years and years, yet the dollar has lost about 50% of its value in the past decade against a basket of global currencies. The dollar's performance against gold is even worse. At what point does this relatively controlled decline in the dollar become chaotic? I can assure you that smart money is stealthily moving out of the dollar and into gold. When there is mass recognition that the dollar is going way down, good luck trying to head for the exit.

Like it or not, we are approaching a time of volatility both economically and socially. Gold is the only true hedge against instability. The coming volatility is already embedded in the system, whether it is in the form of complex derivatives, insane debt levels, unprecedented unemployment statistics, or a fundamentally flawed global currency arrangement. Be sensitive to the message gold is relaying right now- the worst is definitely not behind us.

This post has been republished from Moses Kim's blog, Expected Returns.

Rebalancing The US China Economic Relationship

According to Robert Reich, Barack Obama's plan to rebalance the economic relationship between China and the US is destined to fail due to China's economic policies designed to maintain order. While the productive capacity of China continues to grow, just 35% of the economy is attributed to personal consumption, down from 50% a decade ago. See the following post from Economist's View.

Robert Reich says China won't be abandoning its currency policy anytime soon:

China and the American Jobs Machine, by Robert Reich, Commentary, WSJ: President Barack Obama says he wants to "rebalance" the economic relationship between China and the U.S. as part of his plan to restart the American jobs machine. "We cannot go back," he said in September, "to an era where the Chinese . . . just are selling everything to us, we're taking out a bunch of credit-card debt or home equity loans, but we're not selling anything to them." He hopes that hundreds of millions of Chinese consumers will make up for the inability of American consumers to return to debt-binge spending.

This is wishful thinking. True, the Chinese market is huge and growing fast. ... But in fact China is heading in the opposite direction of "rebalancing." Its productive capacity keeps soaring, but Chinese consumers are taking home a shrinking proportion of the total economy. Last year, personal consumption in China amounted to only 35% of the Chinese economy; 10 years ago consumption was almost 50%. Capital investment, by contrast, rose to 44% from 35% over the decade. ...

Chinese companies are plowing their rising profits back into more productive capacity—additional factories, more equipment, new technologies. China's massive $600 billion stimulus package has been directed at further enlarging China's productive capacity... So where will this productive capacity go if not to Chinese consumers? Net exports to other nations, especially the U.S. and Europe. ...

The Chinese government also wants to create more jobs in China, and it will continue to rely on exports. Each year, tens of millions of poor Chinese pour into large cities from the countryside in pursuit of better-paying work. If they don't find it, China risks riots and other upheaval. Massive disorder is one of the greatest risks facing China's governing elite. That elite would much rather create export jobs, even at the cost of subsidizing foreign buyers, than allow the yuan to rise and thereby risk job shortages at home.

To this extent, China's export policy is really a social policy, designed to maintain order. Despite the Obama administration's entreaties, China will continue to peg the yuan to the dollar... This is costly to China, of course, but for the purposes of industrial and social policy, China figures the cost is worth it. ...

While China's currency policy is certainly a worthy topic for discussion, lately we are spending a lot of time pointing our fingers at others and blaming them for our problems rather than engaging in the more difficult task of getting our own house in order. I'm not saying that we should ignore things that unfairly disadvantage us, whatever those might be, just that a continued focus on external factors provides a convenient excuse to avoid going through the difficult changes needed to reform our own economy, an excuse that can be exploited by powerful interest groups opposed to needed change (though Reich at least touches on the US side of the equation in a part I left out).

Yes, China needs to change its currency policy, and the fact that it won't or can't change will probably lead to further economic imbalances, perhaps to dangerous levels, and cause increased political tension in the future. But I hope we don't allow the financial industry and others wishing to deflect blame for the crisis and avoid stricter regulation to use the controversy over China's currency policy to divert our attention elsewhere and alter the narrative about how we got into this mess.

This post has been republished from Mark Thoma's blog, Economist's View.

When The Federal Reserve Gets It Wrong

While often criticized as ignorant and misguided, central bankers make decisions that they deem as the best for their country using the facts and information that they have available to them at the time. Setting monetary policy is a high-stakes, high-skill game played by fallible humans, and flawed decisions have led to major consequences throughout history. See the following post from The Capital Spectator.

Central bankers are a powerful lot and so it’s an easy to assume that they’re also prescient. When you’re making decisions that affect the livelihoods of millions of people—billions on a global scale—confusing people with their institutional authority can become habit forming. But central bankers are mortal, and therefore prone to mortal decisions, a.k.a. flawed decisions. Heck, it happens to the best of us at times. The only difference is that most people’s day jobs don’t cast a long shadow over a nation’s money supply.

No less an expert on central banking than Paul Volcker, the patron saint of inflation slayers everywhere, advises that “central bankers suffer from hubris like everybody else.” That’s not surprising, but it does have consequences.

The monetary policy du jour, as a result, may not be exactly what the macroeconomic gods ordered. A mismatch between the optimal monetary policy and current events is in some sense fate. Working with limited information makes it hard to know if today’s actions will suffice for the uncertainty that arrives tomorrow. As a result, we can talk of monetary policy in terms of its degree of inaccuracy or accuracy.

Intelligently dispensed or not, monetary policy steers economic activity, ranging from decisions in asset pricing to lending preferences to choices that affect the labor market. Alas, poor decisions have a habit of delivering less-than-satisfying results.

Remember all the talk of the Great Moderation? “One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility,” Ben Bernanke pronounced in early 2004 in his then-current position as a Fed governor. “Reduced macroeconomic volatility,” he went on to explain, “has numerous benefits. Lower volatility of inflation improves market functioning, makes economic planning easier, and reduces the resources devoted to hedging inflation risks. Lower volatility of output tends to imply more stable employment and a reduction in the extent of economic uncertainty confronting households and firms. The reduction in the volatility of output is also closely associated with the fact that recessions have become less frequent and less severe.”

It’s debatable how much the Fed was influenced by the past for setting monetary policy in 2004 and beyond, but some observers of central banking suggest that the calm history in those halcyon days led policymakers astray. Anna Schwartz of the National Bureau of Economic Research speaks for many dismal scientists when she charges in a recent essay that the Fed kept interest rates too low for too long earlier in this decade. In turn, the inappropriate interest rates distorted markets, she says, and the fallout wasn't trivial. “In the case of the housing price boom, the government played a role in stimulating demand for houses by proselytizing the benefits of home ownership for the well-being of individuals and families.” The net result, to state the obvious, was less than optimal.

Volcker has commented that the preference for low interest rates earlier in this decade was based on a “misreading of the Japan situation.” The worry that deflation threatened in 2001-2005 was simply wrong, as was the resulting prescription: low interest rates.

Economist Scott Sumner opines that another Fed mistake of some consequence was the decision in September 2008 to leave interest rates as is. “On September 16, 2008, the Fed made one of its most costly errors ever,” he recently wrote. “Immediately after the failure of Lehman Brothers, the FOMC decided to leave the target rate unchanged at 2.0 percent.” Monetary policy, in other words, should have been far more supportive given current events. It wouldn’t have prevented the financial crisis, but it might have minimized the fallout, perhaps by more than a trivial amount.

The idea that central banks have power of the ebb and flow of economies isn’t new. In 1963, Milton Friedman and Anna Schwartz reordered perceptions of the Great Depression with their the monumental A Monetary History of the United States, 1867-1960, which indicts the central bank’s monetary policy for the events of the 1930s. Friedman and Schwartz argued that the central bank’s errors in managing the money supply were the primary catalyst that turned recession into something far worse. “Prevention or moderation of the decline in the stock of money, let alone the substitution of monetary expansion, would have reduced the [economic] contraction’s severity and almost as certainly its duration,” they wrote.

Today, central bankers the world over are faced with another decision of above-average consequence. The exit strategy, as it’s called, requires that the Fed and its counterparts choose when to begin drawing back the enormous liquidity that’s been injected into the global economy.

“It is clear…that our exceptional support cannot last for too long a period of time since there are negative side effects,” Jürgen Stark, a member of the European Central Bank’s executive board, said last week. Jan F Qvigstad, deputy governor of the Central Bank of Norway, also remarked last week that the country’s current target policy rate of 1.5% “will be 2.75 per cent around the end of next year.”

Some central banks have already begun raising rates, as we noted a month ago. The Fed too must return monetary policy in the U.S. to something approaching a normal state. As always, the possibility of raising rates too early, too late or insufficiently keeps everyone guessing. Accordingly, inflation may or may not be a problem in the years ahead.

“At some point, the economic trends will shift and waiting too long to raise interest rates will be the primary hazard,” we wrote in March. “We don't know if the turning point will come in a few months or a few years, but we shouldn't delude ourselves that it's never coming.”

The risk tied to the timing and magnitude of the exit strategy isn’t necessary limited to inflation, as the tumultuous history of this decade reminds. We might add that we also shouldn’t kid ourselves that the Fed will make exactly the right decisions at exactly the right time.

There are many advantages to fiat money. But the main advantage is also the primary risk: flexibility. As with democracy and investing, choices matter. Rarely are those choices perfect. Sometimes they’re egregiously wrong, sometimes they’re more or less productive. The great question is what outcome will the decisions give us this time?

This post has been republished from James Picerno's blog, The Capital Spectator.

Central Banks Have Become Net Sellers Of Gold

Following the huge purchase of gold by the central bank of India, the two decade long trend of central banks as net sellers of gold seems to have been reversed. There seems to be a growing unease surrounding the US dollar, although a dollar rebound could quickly put a halt to the bullish gold market. See the following post from The Mess That Greenspan Made.

A week removed from the blockbuster announcement that the Reserve Bank of India had purchased 200 tonnes of gold from the IMF, precious metals continued their ascent, gold making fresh all-time highs last week at just over $1,120 before ending the week with a gain of about $20 at $1,118 an ounce. Silver posted a modest gain, up from $17.39 an ounce to $17.42 an ounce.

The view that central banks will continue to be net buyers of gold rather than net sellers (as has been the case for about the last twenty years) has many calling the Indian purchase at $1,045 an ounce the "new floor" for the gold price.

That would certainly seem to make sense at least for the near-term as market analysts speculate on which central bank might be next to buy IMF gold while hearing the U.S. Federal Reserve and international G20 representatives stress that it is far too early to begin removing the massive liquidity and stimulus that have seemingly rescued the world from another Great Depression.

The recent rise in the gold price has obviously been aided by a weakening U.S. dollar but, with unemployment set to go even higher over the next six months, there is little reason to think that the Fed will do anything to bolster the currency during that time.

Rumors swirled last week that the Reserve Bank of India may have sold U.S. Treasuries to fund its recent gold purchase and there is growing unease amongst countries that maintain dollar "pegs" for their currencies as they have to print more of their own currency to buy dollars and maintain that peg.

As for silver, it is interesting to note that inventory at the iShares Silver Trust ETF (NYSEArca:SLV) continues to rise, surging in recent days to a new all-time high with the addition of 200+ tonnes as shown below.



Meanwhile, inventory at the world's most popular gold ETF, SPDR Gold Shares ETF (NYSEArca:GLD), remains below levels seen at mid-year.

It should be an interesting period ahead for both gold and silver since, going back to very early in the decade, there has been a repeating two-year pattern for the metals that can been seen in the gold chart below. Since 2002, prices have peaked at new highs early in the even numbered years - in 2004 at $425, in 2006 at $725, and, most recently, in 2008 at $1,035.

In many ways, recent events are shaping up to be a repeat of this pattern which, based on the previous peak-to-peak gains would imply a gold price somewhere north of $1,300 early next year.


Of course, any sharp rebound in the dollar (which some are still loudly predicting) would reverse this trend very quickly.

There were some truly odd goings on in Vietnam over the last week or so that, for those who pay attention to this sort of thing, really adds to the case for a much higher gold price, perhaps sooner rather than later. After seeing a surge in buying in gold bullion in recent years, particularly after inflation soared to nearly 20 percent in early-2008 and investors looked to preserve their wealth, the government banned imports of the metal.

Gold continues to be traded in the country, however, due to the limited supply, it has developed its own local market that, last week, saw bullion trading at about $60 higher than in global markets. After markets went "crazy" (see this account in Vietnam.net), the government announced that it would resume imports of the metal and premiums are now reverting quickly to more normal levels.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

The Most Expensive Real Estate In The World

Overseas Property Mall listed the top 10 most expensive streets in the world, that cost at least $28,000 for each square meter. Despite the astronomical prices, the most expensive real estate actually outperformed most markets, declining only 12% last year. See the following from Overseas Property Mall.

If you’ve recently found a little cash down the back of the sofa and you’re in a property-buying mood, you may like to take a look at the following streets around the world. Although prices on these most expensive streets fell in overall value by 12% last year, that’s still better than the 20% to 30% experienced in the mainstream market. Europe was less hard hit than the US.

1. Avenue Princesse Grace, Monaco, $120,000 per sq/m

The most expensive street in the world, where prices last year were actually $190,000 per sq/m. There could be a few who made the plunge last year with a little buyer’s remorse right now. A 334 sq/m four-bedroom penthouse here will set you back US$50.

2. Chemin de Saint-Hospice, Cap Ferrat, South of France, $100,000 per sq/m

Ah, that’s more like it, much more affordable. Less than thirty miles away Avenue Princesse Grace, with just fifteen houses with Mediterranean views. Just one for sale at the moment at an undisclosed price. But as they say: if you need to ask the price, you can’t afford it.

3. Fifth Avenue, New York, $72,000 per sq/m

A 400 sq/m apartment with terraces overlooking Central Park sold for $29m in June. Many residents are staying put until prices come back up. I don’t blame them. $29 million? Chickenfeed.

4. Kensington Palace Gardens, London, $65,000 per sq/m

Prices on KPG, as those in the know call it, have fallen 15% to 20% recently. A private road that abuts Kensington Palace, with several embassies in residence. You’d need to own a country to buy there.

5. Avenue Montaigne, Paris, $54,000 per sq/m

We’re almost slumming it at these prices. This street includes the Élysée Palace, official residence of someone called the President of France. The strong euro and views of the President’s wife have kept prices higher here than some other places.

6. Via Suvretta, St Moritz, Switzerland, $45,000 per sq/m

Prices rose this year by 18%. Yes, rose. That’s rich people trying to take advantage of Switzerland’s low taxes as other countries put theirs up. Geneva and Zurich are also experiencing a boom.

7. Via Romazzino, Porto Cervo, Sardinia, $42,000 per sq/m

Italy’s most expensive street, popular with Russian billionaires, one of whom has apparently bought eight houses there. Everyone needs at least eight houses.

8. Severn Road, The Peak, Hong Kong, $40,000 per sq/m

Down from the number two spot last year, when prices were $121,000 per sq/m. I don’t care how rich you are, that’s going to hurt.

9. Ostozhenka Street, Moscow, $35,000 per sq/m

Russia’s wealthiest have apartments on Ostozhenka, which makes up part of the city’s “Golden Mile”. Free furry hat with each purchase.

10. Wolseley Road, Point Piper, Australia, $28,000 per sq/m

Prices have strayed constant due to the comparatively strong Australian economy and currency.

This post has been republished from Overseas Property Mall.

The Trouble With The Government-Owned Mortgage Market

Not a lot of attention has been paid to the government buying a trillion and a half dollars in mortgage related debt, although they have essentially bought most of the mortgage market. Tim Iacono discusses why there should be a greater concern about the government buying so much debt with newly printed money. See the following post from The Mess That Greenspan Made.

In reading the newspapers over the last eight months, since the Federal Reserve decided to print money on a massive scale in order to buy $300 billion in U.S. Treasuries along with about a trillion and a half dollars in mortgage related debt, these two groups of purchases have been viewed quite differently.

The former is seen as a particularly bad thing for a central bank to be doing as this money created "out of thin air" is used to directly fund government spending, spurring comparisons to Zimbabwe and Weimar Germany where similar efforts led to hyper-inflation.

However, the latter is viewed as something of a benign undertaking (by comparison, at least), widely perceived as providing needed support for housing in the U.S. by creating a market for housing debt that might not otherwise exist.

After all, would you buy 2003-2008 vintage mortgages that have been "securitized" by Wall Street firms or one of the two wards of the state - Fannie Mae and Freddie Mac - if the Fed wasn't buying the stuff too?

I wouldn't.

Is there really that big of a difference between these two?

Since the U.S. government and their "too big to fail" banking friends now essentially own the entire domestic mortgage market (causing understandable confusion as to which way the arrow would be pointing on a hypothetical org chart that included the U.S. government and "quasi-government" organizations like Citibank and Bank of America) is there really that much of a distinction between U.S. debt and U.S. housing debt?

By buying all this stuff, isn't the central bank effectively monetizing the housing debt?

And shouldn't a lot more people (particularly in China and Japan) be concerned?

As shown below in the now familiar depiction of the Federal Reserve's balance sheet, since the financial crisis has ebbed and banks are able to pay back some of the money they had to borrow when it looked like the entire world was going to implode, the only items that continue to grow are U.S. Treasuries, mortgage-backed securities (MBSes), and agency debt in the form of loans to Fannie and Freddie.



Clearly, there are big differences between U.S. debt and these two forms of housing debt.

For example, when the government sells Treasuries to the central bank in exchange for newly printed money, it does so with the tacit understanding that the money will never have to be paid back.

But, when the Fed does the same thing in exchange for Fannie and Freddie bonds, then...

Well, actually, these two appear to be one and the same. The GSEs are fundamentally bankrupt, a characterization that, save for its ability to borrow and print money, applies to the U.S. government as well, and there would seem to be little chance of all the GSE bonds owned by the Fed being redeemed at full value unless the government steps in with borrowed money or, in the oddest of all circuitous monetary routes, with money it received from the central bank itself.

However, there is a distinction between U.S. debt and mortgage backed securities. In the case of the latter, newly created money is paid to whoever used to own the securitized loan - Fannie, Freddie, Citibank, Bank of America, etc. - and then, in theory at least, the central bank sees returns based on homeowners making their mortgage payments.

The only thing is, more and more homeowners are no longer able to make their payments and, as a result, the value of these securities would have tumbled to unknown depths if not for the central bank coming to the rescue and paying what others won't.

What is the true value of these mortgage backed securities?

In theory, we'll find out early next year when the Fed stops buying them, but, like the homebuyer tax credit, don't be surprised if this wildly popular program is extended, perhaps indefinitely as waves of foreclosures come ashore in 2010 and 2011.

Perhaps it would help to consider the similarities between the Fed using its printing press to buy Treasuries and to buy MBSes.

On the one hand, you have a government that got itself into a jam by spending more money than it could bring in or borrow at low interest rates, so the central bank had to print up money to make up the difference, trading newly created U.S. dollars for U.S. Treasuries.

On the other hand, you have a housing market that got itself into a jam, enabled by the 30-year government drive for higher rates of homeownership which was financed by the government sponsored owned mortgage giants and banks now deemed too big to fail, all of this culminating in one more in a long series of bursting asset bubbles that appears to be business as usual in recent decades for the U.S. economy.

That the Federal Reserve has to print money "out of thin air" to buy $1 trillion or so of this souring mortgage debt shouldn't come as too big of a surprise.

In both cases it's a matter of throwing good money after bad, the odds of the Federal Reserve getting anywhere near what it paid for these MBSes (if and when it ever goes to sell them) being about as good as the odds of the U.S. government running a sufficient surplus to pay back any of the $300 billion that was given to it by the central bank.

The system wasn't set up to work this way.

If the founding fathers knew that we had created yet another central bank and, not only was it printing up money to fund government spending but it was buying up home loans, they'd roll over in their graves (except maybe for Alexander Hamilton).

Since its founding almost a hundred years ago, the central bank has, for the most part, done its job simply by buying and selling treasuries, a fact that is clear to see in recent data below.



But, over the last year or so, there's been a radical change in what the central bank buys with money it creates with a simple keystroke and, now that housing and government activities have been so intertwined, is there any real difference between the U.S. government's finances and the finances of the nation's housing market.

It's one thing to step in and provide support for commercial paper markets and money markets, but it's quite another to step in and support the housing market that is now almost wholly owned by the U.S. government in one way or another.

You don't just "unwind" this kind of support.

Of course, if home prices zoom back to their 2005-2006 highs, it's quite possible that the GSEs will spring back to life despite being in the hole by over $100 billion with the red ink still flowing freely. In this case, the Fed could probably sell all its MBSes back into the market and all would be square.

But, that seems about as likely as the U.S. government running a surplus.

If the mortgage backed securities do get sold back into the market in the coming years at anywhere near the price the Fed paid, then all we'll have succeeded in doing is re-inflating the housing bubble, which, come to think of it, is probably the current plan.

But, more likely than not, all this new money that has and will continue to be conjured into existence to buy bad assets - be they U.S. treasuries, bonds issued by Fannie and Freddie, or home loans made against overpriced houses - will all just make the rest of the U.S. money currently in existence less valuable simply because there is more of it.

Maybe a lot less valuable.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

Excessive Debt: A Destroyer Of Great Nations

Moses Kim writes that news of an economic recovery is nothing more than propaganda to distract people from the government destroying the economy with debt. With a record budget deficit for the month of October that included a $17.93 billion payout for interest alone, the national debt continues to spiral out of control. See the following from Expected Returns.

Forget all the hoopla you hear from the mainstream media and focus on reality. We are far, far away from any sustainable recovery. With tax receipts collapsing, and American businesses and consumers on life support, there is really nothing our government can do to stop this economic collapse. Of course that won't stop our clueless officials from trying, and in the process of doing so, destroying the dollar. From the WSJ, U.S. posts $176.6 Billion Deficit for October:

The federal government kicked off fiscal year 2010 by posting its widest-ever October budget deficit, the Treasury Department said Thursday.

The $176.36 billion gap is more than $20 billion wider than the shortfall recorded in October 2008, driven up by lower tax receipts, stimulus-related revenue reductions and consistently high government outlays.

Treasury's monthly budget statement shows receipts were $135.33 billion in October, down 18% from a year earlier and at the lowest level since October 2002. Meanwhile, outlays were $311.69 billion, down 3% from a year earlier and at their second-highest monthly level on record.

So much for "green shoots"- our budget shortfall is already well-beyond crisis levels. The budget deficit in October would have been the equivalent of the annual budget deficit a mere decade ago. Even with all this government stimulus, is unemployment improving? Are new businesses opening? Sans government propaganda, does anyone really "feel" that this recession/depression is actually over?
Debt Reduces Productive Capacity

At the equivalent of 9.9% of gross domestic product, the figure is the widest U.S. deficit as a share of GDP since 1945.

The government paid $17.93 billion in net interest last month on the federal debt. Net interest on the federal debt excludes interest paid on nonmarketable government securities held by federal trust funds, such as Social Security.

The only ways to make up for shortfalls in tax receipts are through higher taxes, debt issuance, or inflation. Study your history books and see that excessive debt has always destroyed great nations. Governments throughout history have taken on the responsibility of trying to "fix" debt crises, and have succeeded only in making the problem worse.

We are experiencing a debt crisis in all sectors of the economy. Overleveraged individuals are being gouged by credit card companies, which means that there is no more money left to organically stimulate the economy and create real jobs. Banks are overleveraged, which means their primary focus will not be to lend to consumers, but to repair capital ratios. And then you have the U.S. government- the most overleveraged entity in the world. There is no doubt in my mind that the cascading effect of debt defaults- from states and municipalities, to individuals and the federal government itself- will wreak utter havoc on our economy.

All of our potential productive capacity is being wasted to service our exponentially growing debt. You just don't solve a debt problem by blindly throwing money here and there, and getting deeper and deeper into debt. It's been tried before in Japan, and that experiment has failed magnificently. It's a sad fact, but our country is being destroyed before your very eyes.

This post has been republished from Moses Kim's blog, Expected Returns.

The Tenuous Rebound Continues

James Picerno describes two economic indicators that are providing good signs of economic recovery - the positive yield curve and a peak of unemployment claims. On the other side, the lack of job creation and lending could threaten economic expansion. See the following post from The Capital Spectator.

The news on new filings for unemployment benefits once again favors the idea that economic recovery is continuing. It’s a tenuous rebound, one ripe with caveats, including a big one we’ll discuss below. But it’s a rebound nonetheless.

The Labor Department today reports that initial jobless claims dropped to 502,000 last week, down from the previous week’s 514,000. That leaves us at the lowest level since the week through January 3, 2009. As our chart below reminds, the trend has certainly been our friend this year for the general change in jobless claims.



Back in March, we wrote about the possibility if not the likelihood that a peak in jobless claims would signal the end of the recession. In subsequent months, we revisited the mounting evidence that the initial claims pattern was on a sustainable downtrend, including here and here. Jobless claims alone don’t suffice as a definitive sign of things to come, but this data series is on the short list of clues to watch for judging turning points in the business cycle.

Changes in the yield curve are also worth monitoring, and this too has been flashing a positive signal for some time. History tells us that when the yield curve turns negative (short rates above long rates), the odds of recession go up sharply. The subsequent return of a positively sloped yield curve (short rates below long rates) provides the opposite message: rebound is coming. As we've discussed in the past, when the yield curve turned positive after signaling recession in 2007, the implications were bullish. The signal was early, as it usually is, but proven durable once more.

Today, a variety of economic trends continue to point in the direction of recovery. We routinely dissect and analyze a variety of macro indictors in each issue of The Beta Investment Report, your editor's monthly review of asset allocation, portfolio strategy and economic news. The newsletter’s proprietary set of economic yardsticks are still flashing encouraging signs, as illustrated in the second chart below (republished from the current issue of the newsletter). Based on the last full month of data reported (through Sep. 2009), our composite measures of U.S. economic activity remain upward biased. The October data reported so far, along with today’s initial jobless claims update, further support the idea that recovery momentum remains intact.



The natural tendency of the economy to snap back after stumbling is still alive and kicking, strengthened by ongoing monetary and fiscal stimulus efforts. But this isn’t a normal recovery, in part because the labor market losses have been unusually deep and long lasting. Indeed, the great challenge still lies ahead, as we’ve been discussing for some time. The problem isn’t so much job loss from this point forward; rather, it’s the lack of job creation that may threaten.

In essence, we should distinguish between recovery and growth. The business cycle is now in recovery mode, but growth of a meaningful, sustainable sort has yet to arrive.

There are other ills afoot as well. As we discuss in the current issues of the newsletter, lending activity continues to shrink. Commercial and industrial loans fell nearly 6% in September from the previous month and are off by nearly 11% over the past year. Lending is a critical factor in fueling future growth and so the trend here suggests that expansion will be muted for the foreseeable future beyond the snapback effect that’s prevailed recently.

Minting new jobs and juicing lending are among the last great cleanup actions for mending the Great Recession. But the statistical clues at the moment don’t offer much encouragement for an imminent recovery on these fronts. Yes, the forces of contraction per se are rapidly fading, as suggested in today’s jobless claims report. It's the weakness on the outlook for growth that worries us.

This post has been republished from James Picerno's blog, The Capital Spectator.

The Proposed Financial Reform Would Be A Mistake

Professor Peter Morici is strongly critical of the bank regulatory reform bills that are currently being considered by Congress. Some of the problems he points out in the proposed legislation are placing power in the wrong hands and not sufficiently protecting against systemic risk. See the following from from The Street.

The sweeping bank regulatory reform bills introduced in the House and Senate focus too much on who does what -- reorganizing who regulates what banks and which activities.

Those bills would regulate banks badly by imposing too many costly requirements instead of improving the principles of good banking practice and risk management.

For example, having a council of regulators on systemic risk and oversight is a terrible mistake -- either it will be management by committee (an interagency group that reaches consensus slowly and badly in crises) or it will be dominated by its chairperson, who will be engaged in tugs of war with the Fed chairman at times when decisive, surgical and dramatic action is required.

Ultimately, the Fed must provide the resources for resolution of failing entities having systemic consequences -- disasters the size of Lehman or AIG(AIG Quote) -- because no fund envisioned by taxing big firms will be big enough.

The FDIC already collects such a tax from banks (FDIC insurance premiums), and that fund has proven to be too small for the failures of regional banks. In the end, the Fed must provide the money.

Will this new systemic risk panel force the Fed to print it? It is a terrible idea to put those powers into the hands of a more political body.

The consolidation of Controller of the Currency and the Office of Thrift Supervision is smart, but consumer protection belongs in the new agency, too. If consumer protection is put in a separate agency, then the health of the banks in the regulation of things such as community lending mandates will be ignored --congressional mandates were among the principal causes of the Fannie Mae (FNM Quote) failure. A political appointee will make banks do reckless things and create all kinds of problems.

Proposed legislation envisions taxing and micromanaging banks, instead of relying on: stronger capital requirements; insulating (separating) the banks from the casino, and establishing principals of good practice that should guide the decisions of regulators and bankers alike.

Instead:

• Leave general bank holding-company oversight and systemic risk regulation at the Fed, and consolidate other bank regulation and consumer protection. Give the Fed resolution authority for entities too large or complex for the FDIC to handle.

• Stronger capital requirements -- that's motherhood.

• Separate commercial bank balance sheets/assets from those of investment banks, hedge funds, etc. Base banking compensation solely on banking activities -- that will solve the compensation issue privately if commercial bank investments in securities and the derivatives market are adequately reformed.

• Don't bring back Glass Steagall, but do limit the scope of acceptable securities that may back up bank deposits -- get banks out of betting on securities, which was a major problem at regional banks as well on Wall Street.

• Require adequate assets to secure derivatives contracts -- something that was woefully lacking at AIG, Lehman etc. More than reporting, that will help reduce abuses in derivatives trading and their threat to systemic stability.

• Reform lending practices, which is already happening thanks to Federal Reserve action.

This post has been republished from The Street, an investment news and analysis site.

Does The US Government Really Want A Strong Dollar?

US Treasury Secretary Timothy Geithner says he is in favor of strengthening the dollar, yet extensive government spending and low interest rates contradict Geithner's rhetoric. Moses Kim points out that the US may not want a strong dollar because it would make servicing the record US debt more expensive. See the following post from Expected Returns.

I just can't help but laugh at the utter hypocrisy of government officials. How can you claim to support a "strong dollar" while enacting policies that contribute to record budget deficits? I think all Americans support a strong dollar, but right now we need firm action from our leaders, not just talk. From Reuters, Geithner wants strong dollar, will tackle deficit:

Treasury Secretary Timothy Geithner said on Wednesday he believes strongly in the need to maintain a strong dollar and said the United States was determined to get its budget deficit down.

The dollar's decline has been a source of concern in the export-heavy region, especially since top exporter China keeps its currency's value closely managed against the U.S. dollar and so felt less impact on prices for its exports than other Asian nations that let their currencies float freely.

"I believe deeply that it's very important to the United States, to the economic health of the United States, that we maintain a strong dollar," Geithner said in a meeting with Japanese reporters at the U.S. embassy.

From Geithner's statement, you can see that he understands the correlation between budget deficits and a weak currency. This flies in the face of the views of Paul Krugman who thinks that deficits don't matter anymore, and that government spending can offset productive slack in the private sector. All government spending has done so far is distort economic statistics and convince the public that the recession is over.

A "strong dollar" policy makes for a good sound bite, but it is inapplicable in reality. What does a strong dollar entail? It means debt servicing becomes increasingly expensive in real terms, which is the equivalent of economic suicide when you are the most overdebted nation in the history of the world. There is absolutely no way our government supports a "strong dollar"; if they really did, you would see interest rates at much higher levels right now.

Consumer Will Not Participate In Recovery

Geithner said the reality was that if a still-struggling recovery was to be turned into sustainable future growth "it will have to be less driven by the U.S. consumer" because heavy levels of debt were forcing American consumers to save more.

Geithner cited signs of stabilization in the global economy but said it still needed the stimulus that governments around the world have poured in to foster stronger growth.

Geithner is right- the American consumer will not lead us out of recovery. This begs the question: what will lead our economy out of this recession? Our manufacturing base has been gutted over the past generation of overconsumption, and it will take years for us to start to produce again and run trade surpluses. Of course the answer is the government, with its technology of the printing press.

What we really need is a period of fiscal discipline where individual households and the government get their respective financial houses in order. Savings, or deferred consumption, are the true foundation of growth. By loading our balance sheet with debt, we are guaranteeing protracted economic stagnation. Consequences, consequences, consequences. You can be sure that post-Baby Boom generations will pay the consequences of government ineptness.

This post has been republished from Moses Kim's blog, Expected Returns.

How Effective Has The Stimulus Been For Jobs?

Although the stimulus has been slow to produce the jobs that were expected, a second stimulus would likely be too politically damaging to pursue. The White House economists estimate that a million jobs have been created or saved, however the number of jobless Americans continues to grow to record highs. See the following post from Economist's View.

Gary Burtless argues that the job creation numbers the administration issued underestimate the true size of the impact:

Counting the Jobs Produced by the Stimulus, by Gary Burtless, Brookings: When the stimulus package was enacted last winter, the Administration said its goal was to create or save 3½ million jobs by the end of next year. How closely has the Administration come to achieving that goal? A couple of weeks ago the White House issued an interim report on jobs directly created or saved as a result of one part of the stimulus package, the grants or contracts directly made by the federal government or indirectly provided through federal aid to state and local governments. The report has been subject to minor carping and major criticism. ...

In essence, the reports distilled by the White House provided evidence from 150,000 anecdotes. According to the Administration’s summary, the reports offered evidence that 640,000 jobs have been directly created or saved... Jared Bernstein, the Vice President’s chief economist, emphasized that the 640,000 count represents an incomplete tally of the total jobs added or saved as a result of the stimulus package. It ignores, for example, the jobs created or saved as a result of personal tax cuts or hikes in unemployment compensation checks. We cannot collect anecdotes from Walmart, Safeway, or Disney World telling us how many jobs have been produced by higher consumer spending induced by the stimulus package. ... We must rely on elaborate, less transparent data analysis to uncover the indirect effects of the stimulus package. When the indirect effects are included, White House economists estimate that over a million jobs have so far been added or saved as a result of the stimulus.

The Wall Street Journal suggests that the White House estimate of 640,000 jobs directly saved or created may overstate direct job creation by 20,000 positions. Even if the Journal’s estimate is correct, the difference represents less than 2% of the total number of jobs directly or indirectly saved and created by the stimulus. ...

Unless the labor market deteriorates much further, I am pessimistic about the political prospects for another major stimulus package. The Administration’s opponents have been successful in sowing doubts about the wisdom of the last stimulus. ...

In this political environment it is unlikely Congress will pass a major new stimulus package anytime soon. What is more likely - indeed, what is essential - is the continuation of stimulus programs that are currently scheduled to expire. Last week the House and Senate extended unemployment protection for workers who have lost jobs in the current recession. These protections ought to be extended until the job market improves significantly... If unemployment is likely to remain over 9% for an extended time, there is a compelling case for additional public infrastructure investment. Given high unemployment in the construction and capital goods industries and federal borrowing costs that remain near a post-war low, it makes sense to invest in public capital projects over the next few years. If the federal government does not have adequate plans for such investments, it should start making them soon.

It's going to take quite awhile for the economy to generate enough jobs to return unemployment to normal levels, and more stimulus to help the process along is certainly needed. But I also think that its hard to imagine a major stimulus package getting through Congress. If Washington's interest in helping wanes as the business and the financial sectors begin to recover even though labor markets continue to struggle, then, despite the professed allegiance of many Democrats to the working class, it will tell you that their true allegiance lies elsewhere.

This article has been republished from Mark Thoma's blog, Economist's View.

Unique Considerations When Owning Gold

While more investors find gold to be a good investment in today's uncertain economic climate, they are learning how to deal with the unique considerations for gold investment like finding a safe place for storage. Tom Dyson explains some of the ways in which to transfer and store physical gold and how to invest in gold with your IRA through a custodian. See the following from Daily Wealth.

"Keep moving," said the TSA agent...

Two years ago, I traveled from Las Vegas to Baltimore with five gold coins – worth $8,000 – in my pocket. I wanted to know if the gold coins would set off the airport security systems.

I put my bag onto the belt and threw my shoes into a plastic bin. I kept the coins in my pocket. The security officer beckoned me through the metal detector.

Nothing happened. The gold coins did not set off the metal detector.

I love owning physical gold bullion. With gold bullion, I have an asset that'll never lose its value or its utility, no matter what happens in politics or the economy. I can't always buy the gold I want at the shop around the corner, so I've spent some time researching the ins and outs of transporting and storing my gold...

For example, if you're moving gold out of the country, keep it in your pocket, not your hand luggage. Only ferrous metal (which contains iron) sets off the detectors in airports. So pure gold coins in your pocket will not set off airport metal detectors. If the gold is in your hand luggage, it will show up in the x-ray machine.

Last week, I sat down with Michael Checkan, an international gold investment specialist who's been in the business for 30 years. I asked him to discuss the different ways to store your gold once you've bought it...

A bank safety deposit box was the first solution Michael mentioned. It is the easiest. Boxes cost as little as $50 a year. If you're already a customer of the bank, they may even offer it to you for free.

But I have a problem with banks. What if they go bankrupt? You don't want to get stuck banging on a locked door when you need your coins in a hurry. Second, Michael says the Feds can force banks to divulge information about your security box. They can force the bank to tell them whether or not you own a box. Then the Feds can issue a subpoena and force the bank to open it.

So Michael suggested keeping gold bullion in an IRA...

To qualify for inclusion in an IRA, the gold must by pure, 24-karat gold. The Feds make one exception to this rule: They allow you to put the U.S. Eagle, a 22-karat gold coin, in your IRA. (Here's a good FAQ about including gold bullion in an IRA.)

I see a couple of big problems with buying gold in your IRA. First, you can't put coins you already own into an IRA. You have to make a fresh purchase. Secondly, you don't have access to the coins. A qualified custodian must keep them on your behalf.

Another option is to send your gold overseas to a private security vault. I like this idea. You keep your gold where it's out of reach of the U.S. government. These private vaults don't qualify as financial institutions, so you don't have to report them as foreign accounts when you file your taxes. Michael recommends Safes Fidelity in Geneva and Das Safe in Vienna. These are the two safest, most confidential vault businesses in the world. You can send them your gold through the mail. Just make sure you use registered insured mail. Or you can take it there yourself.

But of all the places Michael suggested, hiding gold on your property was my favorite solution. You have instant 24-hour access to your gold, and you don't pay any storage charges. The key is, it has to be safe.

One option is to install a safe or a gun locker in a discreet part of your house. Make sure you secure the safe to the floor so a thief can't carry it out of your house. Or you can bury the gold in your backyard or a friend's backyard. You can buy waterproof coin tubes online or go to Home Depot and buy a PVC tube and caps to seal the ends.

Just make sure you tell one person where you hid it... in case something happens to you. And don't tell anyone else.

This post has been republished from Daily Wealth, a contrarian investment site.

Expectations Of Inflation Are Growing

It appears that neither deflation nor inflation are currently a problem with the consumer price index barely moving in either direction. However, the outlook for inflation based on the daily yield spread is growing, which when considered with rising gold and declining dollar, is raising market expectations of future inflation. See the following post from The Capital Spectator.
One of the supporting pillars in the recent rally is the recognition that inflation isn't a problem. Last year's financial crisis knocked the stuffing out of the system's tendency to devalue the purchasing power of fiat currencies over time. The net result is an unusual level of economic cover for keeping interest rates low--really low. Indeed, the primary goal of the Federal Reserve and its counterparts around the world over the past year has been the unbridled pursuit of higher inflation, though not necessarily high inflation.

In the depths of the crisis, the immediate objective was simply to deliver some level of inflation, which is to say something other than deflation. Allowing deflation to fester is simply too great a threat. The basic prescription has been printing money. How's it working?

The good news is that deflation is no longer a clear and present danger, as it appeared to be late last year and into early 2009. Measured by the consumer price index (CPI), the official benchmark of inflation in the U.S., the last monthly decline in consumer prices overall was in March. There have been two months with flat prices, but the general trend since the spring is up, if only marginally. In September (the last reported month), CPI advanced 0.2%, down from August's 0.4% rise, the Labor Department reported. The latest CPI reading shows that consumer prices fell on a year-over-year basis, but that statistical quirk will soon fall away as we move beyond the events of 2008.

The October update on CPI arrives next week (November 18), and the consensus forecast is looking for a 0.2% rise, according to Briefing.com—unchanged from September.

Meantime, the Treasury market's outlook for inflation is climbing. As our chart below shows, the implied outlook for inflation based on the spread between nominal and inflation-indexed 10-year Treasuries is now above 2%. This is the first sustained move above 2% since the financial crisis of 2008, save for a brief rise over this level back in June.



A 2% inflation rate is hardly the end of the world, of course, assuming the forecast proves accurate. Indeed, before last year's crisis, the Treasury market was consistently predicting inflation in the 2.5% range. By that benchmark, the inflation outlook remains muted. Much of the recent rise is simply a return to levels that prevailed under less extraordinary times.

But expected inflation is a slippery concept, as is all other efforts at divining the future. What's more, there's no lone methodology for forecasting inflation, much less one that's persistently accurate. Rather, the crowd is constantly reassessing the future and making guesstimates about what's coming. But while we can debate exactly what constitutes a fair outlook for pricing pressures, the general trend is clear, as the chart above shows. Slowly but surely the market is raising its inflation expectation.

There's some corroborating evidence that this is more than rank speculation. The gold market, for instance, has been pushing higher too. An ounce of gold now trades for roughly $1,100, a roughly 50% rise from a year ago. Meantime, the U.S. dollar has weakened over the past year. The twin trends suggest that inflation is on the rise, if only marginally.

That's no surprise, given the Fed's instinct and decisions over the past year. But in pulling the levers that engineer a higher level of inflation, the great question is whether Bernanke and company can slow and/or turn off the upward momentum in pricing pressure at the appointed time?

One of the Fed's own, James Bullard, president of the St. Louis Fed, tells FT yesterday that for the foreseeable future “you have inflation that will be possibly substantially above target over a horizon of two to four years, and that, I think, is because of the combination of very large fiscal deficits in the US with very easy monetary policy.”

We keep hearing that the central bank shouldn't repeat the mistake of the 1930s, when the Fed started raising interest rates too early, which derailed the nascent recovery. But it's becoming clear that the problems of the moment don't constitute another Great Depression. There are still huge challenges ahead, but they're different challenges than those that confronted policymakers in the mid-to-late 1930s. Nor is it clear that interest rates just above zero are the magic solution to what ails us now.

One can make a case that it was easy money that got us into the current mess and that easy money isn't necessarily going to get us out of the hole this time, as it seemed to in past business cycles. Yes, stabilizing the system was a priority over the past year, starting with preventing deflation. That battle seems to be won. Deciding what comes next, and what it means for portfolio strategy, is now the topic du jour, and it's only just begun. Unfortunately, easy answers aren't forthcoming.

As the FT story on Bullard advises,

Mr Bullard said historically the Fed had waited until two-and-a-half to three years after a recession ended before raising rates. That, he said, “would put you in the first half of 2012”. But the committee might take into account a wider set of factors this time, including the danger that ultra-low rates could fuel asset price bubbles.

“What is different this time is that the argument about staying too low for too long is going to weigh pretty heavily on the committee. It is more than just: ‘What does the output gap look like; what does inflation look like?’”

This post has been republished from James Picerno's blog, The Capital Spectator.

Not Too Late To Profit From Gold

Gold has seen a rapid rise of about 300% since 2000. Despite its lack of intrinsic value or dividends, and the costs of storage, investors are wondering if they still have time to profit from gold's run before it's too late. See the following from Expected Returns.

From The LA Times, Why gold is shining brighter:

The American public has no say in Federal Reserve policy.

But the gold market might.

The metal hit yet another record high on Friday, gaining $6.40 to $1,095.10 an ounce. It jumped $55 for the week and is up $211, or 24%, year to date.

This cannot be comforting to Fed Chairman Ben S. Bernanke. The classic view of gold is that it is the best inflation hedge. That's a faulty assumption, but still: Given the record sums the Fed has pumped into the financial system -- and the fear that that money mountain could eventually power a surge in inflation -- Bernanke doesn't need rising gold prices reinforcing investors' doubts.

Gold is just about the only asset that keeps governments and central banks honest. When governments decide to debase their currency and confiscate the wealth of their citizens, gold rises to reflect this currency debasement.

Gold is no doubt an inflation hedge, but it also rises when people lose confidence in the government. Gold will rise whenever you see times of political instability and uncertainty over the future. As unemployment rises above 10% and people start to realize that "green shoots" are a myth, gold will rise as a reflection of the loss of confidence in government.

"What If" I Bought Gold Earlier?

Investors who've been swapping dollars for gold since the start of this decade are a happy lot. After declining for most of the 1980s and '90s, gold finally bottomed in 1999 around $250 an ounce.

Since early 2001 the metal has been on a bull run that has mocked the U.S. stock market. Gold has risen for nine straight years, and is up 300% since Dec. 31, 2000.

The Standard & Poor's 500 index's return is negative since that date, including dividends.

Gold, a silly artifact to many investors in the 1990s, has become the great "if only" investment: "If only I'd bought it nine years ago, or four years ago, or six months ago."

But even now there are plenty of people who can't bring themselves to consider gold as an investment. It pays no interest, and if you're buying bars or coins (versus owning shares of a mutual fund that holds the metal or stocks of mining firms), it costs money to store safely.

The fallacy that stocks are safe investments in the long run got a lot of people in trouble this decade. You still have people closing their eyes and hoping for the best in stocks when there is a raging bull market in gold that investors refuse to hop on. Expect investor regret to continue as gold reaches new heights and the supposed "bubble" doesn't burst. Gold will eventually reach bubble-like valuations, but that is closer to $10,000 an ounce than $1,000 an ounce. The past couple of weeks have shown that gold moves on its own fundamentals, regardless of dollar strength or the stock market. I'm convinced that the next 5 years will make a believer out of everyone in this gold bull market.

This post has been republished from Moses Kim's blog, Expected Returns.

The Rare Occurrence Of The Jobless Recovery

Although in the past, peaks in unemployment emerged shortly after the end of economic recessions, this will not be the case for the current recession. This time, it looks like unemployment will not reach its peak for a while and the labor market will take much longer than usual to recover. See the following post from The Mess That Greenspan Made.
Writing in this morning's WSJ Ahead of the Tape column($), Mark Gongloff observes that "jobless recoveries" are a relatively new development.

The time-worn Wall Street gospel is that employment is a lagging indicator, but that isn't always so. It has only lagged significantly in the recoveries that followed the past two recessions.

In the eight recessions between World War II and 1982, payrolls bottomed and unemployment peaked, on average, less than one and two months, respectively, after the recessions ended.

Assuming, as most economists do, that the latest recession technically ended in June 2009, this recovery already is looking jobless.
...
Economists, on average, expect unemployment to peak in February 2010 -- eight months after the recession's assumed end. Even that forecast might be optimistic.

Yes, that's a typo in the graphic above (something that seems to happen quite a bit these days). It should say "Nov. 2001" as the end date for the last recession.

In chart form, the situation is as shown below via the Kansas City Federal Reserve.

Those sharp declines in unemployment following all recessions right up through the 1982 downturn represent an economy that is quite different than the one we have today.

Naturally, the differences were viewed as a good thing during the last two recessions when unemployment peaked at relatively low levels.

Now that we're challenging the early-1980s peak in unemployment with a return trip to lower levels of joblessness likely to come at a sluggish pace, these differences are taking on a whole new connotation.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

Still Waiting For Net Job Destruction To End

While the total number of unemployed Americans continues to climb higher, it is expected to peak in the first quarter of next year. But getting to a level of zero job loss is just the beginning -- then comes the hard part of actually creating jobs. See the following post from The Capital Spectator.

Friday's update on October's employment status is neither surprising nor encouraging. The U.S. economy is still bleeding jobs, but that's hardly shocking at this point. It's been clear for some time now that the risk of a jobless recovery is high.

Nonfarm payrolls shed another 190,000 positions last month, a modestly lower pace than September's 219,000 loss but still far away from anything suggesting stabilization in the labor force much less growth. Most of the job destruction came in the goods producing industries, although the services sector managed to shrink by 61,000 jobs in October. The conspicuous points of light were education and health services (a rise 45,000 jobs) and professional and business services (+18,000). But on balance, there's nothing to cheer in today's employment report other than to recognize that the pace of decline overall is considerably lower than it was during the height of the financial crisis late last year and early in 2009. Slim pickings after nearly two years of labor-market contraction.



The good news is that the magic level of zero job loss is coming, and perhaps soon. If we're lucky, it'll arrive before the year is out, although our guess at this point is that the first quarter of next year is a more likely forecast. Rest assured, stability in the labor market is near. Short of some new cataclysmic change in the current economic profile, the stars are aligned for an end to the job destruction that has been nonstop since January 2008. Alas, the bigger problem is not ending the job destruction; rather, the bigger challenge will be minting new jobs.

As of last month, the U.S. economy has lost 7.3 million jobs, or more than 5% of total nonfarm payrolls in December 2007, when the recession began. Given the hefty monetary and fiscal stimulus that's coursing the economy, job destruction can't go on for much longer without a dire change for the worse in the current conditions. We don't foresee such a change and neither do most economists. The positive pull of a rising GDP, as implied by the robust 3.5% annualized growth in the economy in Q3, will act as a brake on further job loss in 2010. Indeed, the natural tendency of the economy to right itself after the recent contraction, along with the liquidity injections from the government, will soon stem the loss in nonfarm payrolls. Yesterday's fall in initial jobless claims suggests as much. New filings for unemployment benefits dropped to the lowest weekly level last week since January.

The great challenge is what comes after the arrival of zero change in the labor market. Turning it into something sustainably positive of some magnitude promises to be one of the biggest macroeconomic policy problems since the Great Depression. One of the dangers associated with this future is minimizing its potential for havoc, if not ignoring it altogether. As the job losses fade on a monthly basis and eventually reach zero and move into modestly positive territory, the crowd's initial reaction is likely to be one of celebration. That is likely to be premature.

Afterward, once reality sets in, the potential is high for ill-advised macroeconomic responses intent on fixing the problem. As the political establishment comes to grips with the future, the body politic will respond with its usual array of poor economic decisions. That penchant has been suppressed for much of the past generation, thanks to strong economic growth that expanded the U.S. labor market. But with a jobless recovery in the offing, and perhaps for some extended period, Washington's inclination to act, and in ways that may be less than economically productive, will grow stronger.

Meantime, corporate America is learning how to be more productive with fewer workers, which bodes ill for hiring, at least for the moment. Nonfarm business sector labor productivity increased at a 9.5% annual rate during the third quarter of 2009, the Bureau of Labor Statistics reported yesterday. This was the largest gain in productivity since the third quarter of 2003, when it rose 9.7%.

Creating jobs on a scale that Americans have come to expect in post-recession periods will prove difficult this time around. At the same time, the non-labor-market recovery will proceed apace, giving rise to what threatens to be the greatest divide between main street and Wall Street in decades if not in all of American economic history.

The biggest challenge, in short, is yet to come. Meantime, first things first: we're still waiting for the job destruction to end after 22 months.

This post has been republished from James Picerno's blog The Capital Spectator.

When Academics And Investors Disagree

Academics and investors don't always see eye to eye. New York University professor Nouriel Roubini who warned of the financial crisis in 2006, is predicting a bubble in gold and stocks while successful investor Jim Rogers strongly disagrees and argues that the real bubble is in US bonds. See the following post from Expected Returns.

From Bloomberg, Rogers says Roubini wrong on bubbles as gold, stocks rally:

Jim Rogers, the investor who predicted the start of the commodities rally in 1999, said that Nouriel Roubini is wrong about the threat of bubbles in gold and emerging-market stocks.

Many commodities are still down from record highs and equity markets aren’t on the brink of collapse, Rogers, chairman of Singapore-based Rogers Holdings, said in an interview on Bloomberg Television today. The price of gold will double to at least $2,000 an ounce in the next decade, he said.

The only slight disagreement I have with Rogers has to do with timing. I believe gold will spike to $2,000 in the next 2-5 years, and here's why. You have to think about what the likely drivers will be to the price of gold. One driver is the value of the dollar. A move to $2,000 in gold implies an orderly decline in the dollar, which is unlikely based on the degree of monetary stimulus we're pumping into the system. To add, the number of dollars outside the U.S. is staggering, and there is a clear move to diversify (read:dump dollars) foreign currency reserves. China has been dumping dollars for gold, and India just made noise by buying 200 metric tons of gold. Remember, Central Banks are conservative institutions, meaning they are not selling their gold anytime soon.
Gold and Commodities Bubble?

Roubini, the New York University professor who warned in 2006 about the coming financial crisis, said on Oct. 27 that investors are borrowing dollars to buy assets and creating “huge” asset bubbles. Rogers said that he’s not buying stocks now, though he may buy more gold.

“What bubble?” Rogers said, when asked if he agreed with Roubini’s view. “It’s clear Mr. Roubini hasn’t done his homework, yet again.”

Roubini told a conference in South Africa last month that investors were doing “the mother of all carry trades” by buying assets with borrowed dollars. He said emerging-market equities are showing a bubble, that gains in some developing- nation currencies are becoming “excessive” and that the rally in oil is “not justified by the fundamentals.”

The burden of proof is on Roubini to demonstrate that the dollar carry trade is going to unwind in the near future. As long as the dollar exchange rate is depressed and interest rates in America remain low, there is absolutely no incentive for investors to unwind their trades. I know the consensus is for the Fed to raise rates sometime next year, but with the underlying weakness in our economy, I don't think that's a viable option.
Rogers Bearish on U.S. Treasuries

In contrast to Roubini, Rogers said the only bubble he sees in the Western world now is in U.S. bonds.

“I cannot conceive of lending money to the U.S. for 30 years,” he said. “Other than that, I don’t see any bubbles going on, unless he knows something the rest of us don’t know.”

The standard line is that investors will flee to the perceived safety of U.S. government bonds if we were to be hit by another shock to our system. I don't see that historic pattern holding this time around. You are starting to see stocks and bonds getting sold off simultaneously while gold rises. I believe these are three secular trends to look for in the future.

Why would you buy government bonds with virtually no yield when you can buy gold? In a no yield environment, gold is the smart play here, not U.S. bonds. Keep in mind that persistent debt issuance results in an exponential growth in servicing costs. In other words, there will come a time when a critical mass of the population realizes our debt is untenable. When that happens look for Treasuries to tank while gold rises parabolically.

This post has been republished from Moses Kim's blog, Expected Returns.

US Is Not The Only Country With Rapidly Growing Money Supply

In an attempt to improve economic conditions in the United Kingdom, the Monetary Policy Committee has increased the rate of money printing. The growth of the money supply is heavily criticized in the UK, which has not yet achieved any degree of economic growth. See the following from The Mess That Greenspan Made.

It's probably fair to say that they're making a much bigger deal about "quantitative easing" (better known as "money printing") in the U.K. than in the U.S. and for good reason. As a percent of GDP, the amount of money "created out of thin air" in an effort to aid the economy is comparable, however, the U.S. has succeeded in producing at least one quarter of economic growth since the recession began almost two years ago while the Brits have nil.

The tone of the coverage, however, is much different, the latest example being this story at the Telegraph after word that the Bank of England plans to buy even more government bonds.

Bank of England expands money-printing programme to £200bn to fight downturn
The Bank of England has expanded its radical programme of printing money by a further £25bn today as the fight against the deepest downturn for decades is stepped up.

The unconventional plan, which is known as quantitative easing (QE) and was first adopted by the MPC in March, will now see the Bank buy a total of £200bn of UK government bonds, or gilts, and other assets from from financial institutions in the hope the money spent will be invested in the wider economy. Some economists expected the programme to be increased to £225bn.

The paper is full of related stories and has been for months now, the criticism coming fast and furious from the Telegraph and elsewhere.

In contrast, in the U.S., it seems as though you're considered some kind of a nutball or "teabagger" if you complain about the Fed's printing press running overtime.

As best I can tell, that's not so on the other side of the Atlantic. The fact that Prime Minister Gordon Brown is widely viewed as being responsible for the current mess the British find themselves in probably has a lot to do with that.

Anyway, back to the BOE decision and the appearance of yet another colorful equivalent to an American expression as highlighted below.

Experts admit that it's hard to judge whether the policy is working, but with the economy still languishing in recession last quarter, most reckon it's worth expanding.

"The UK economy is still in the High Dependency Unit, but without QE it might have been in Intensive Care, or worse," said Stephen Boyle, head of economics at Royal Bank of Scotland. "The extension of the Bank's asset purchase scheme today reminds us that the risks of doing too little considerably outweigh the risks of doing too much."

The MPC also kept interest rates at the record low level of 0.5pc in an effort to keep money as cheap as possible.

They note that the BOE will soon hold government debt equal to 15 percent of the country's GDP. In the U.S., that would work out to be about 2.1 trillion, about the size of the Federal Reserve's balance sheet that contains less than a trillion dollars in U.S. Treasuries, most of the balance consisting of mortgage backed securities and GSE debt, which, for all intents and purposes are also government liabilities.

Well, at least the British press is maintaining a sense of humor about it all - here's the Bank of England doing some "hoovering".


Yes, "hoovering". We learned that one years ago while visiting. When asked if our room was ready yet, the kind lady at the front desk replied, "They're just finishing up the hoovering".

Of course, we chuckled.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

Why More Stimulus Spending Is A Flawed Argument

Despite an improved economic output in the third quarter, decreased consumer spending and a high unemployment appear to be the end outcome of the government's enormous spending. While some economic advisors are calling for more government spending, Moses Kim from Expected Returns explains why this would be a very bad idea.

The 4th Branch of the American Government has spoken. Paul Krugman, in his latest piece of propaganda, demands more stimulus for our economy, which essentially means bigger government. From the New York Times, Too Little of a Good Thing:

The good news is that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, is working just about the way textbook macroeconomics said it would. But that’s also the bad news — because the same textbook analysis says that the stimulus was far too small given the scale of our economic problems. Unless something changes drastically, we’re looking at many years of high unemployment.

And the free fall has ended. Last week’s G.D.P. report showed the economy growing again, at a better-than-expected annual rate of 3.5 percent. As Mark Zandi of Moody’s Economy.com put it in recent testimony, “The stimulus is doing what it was supposed to do: short-circuit the recession and spur recovery.”

Krugman preeemptively calls the program a success even as: unemployment rises; consumer spending and consumer confidence decline; Commercial Real Estate implodes; State and Federal revenues collapse; the dollar gets wacked; and Federal deficits reach Banana Republic-like levels. Interesting. I want to know what data points Krugman is looking at.

In regards to GDP, 1.66% of that "better-than-expected“ GDP number came as a direct result of a disastrous cash-for-clunkers program. Absent government stimulus, you're left with a really ugly GDP print. Nonetheless, the propaganda continues:

What I keep hearing from Washington is one of two arguments: either (1) the stimulus has failed, unemployment is still rising, so we shouldn’t do any more, or (2) the stimulus has succeeded, G.D.P. is growing, so we don’t need to do any more. The truth, which is that the stimulus was too little of a good thing — that it helped, but it wasn’t big enough — seems to be too complicated for an era of sound-bite politics.

But can we afford to do more? We can’t afford not to.

High unemployment doesn’t just punish the economy today; it punishes the future, too. In the face of a depressed economy, businesses have slashed investment spending — both spending on plant and equipment and “intangible” investments in such things as product development and worker training. This will hurt the economy’s potential for years to come.

Even the claim that we’ll have to pay for stimulus spending now with higher taxes later is mostly wrong. Spending more on recovery will lead to a stronger economy, both now and in the future — and a stronger economy means more government revenue. Stimulus spending probably doesn’t pay for itself, but its true cost, even in a narrow fiscal sense, is only a fraction of the headline number.

What Krugman doesn't understand is that governments since the beginning of time have been proven to be the worst allocators of capital. Krugman fancies himself as an expert of the "lost decade" in Japan and the Great Depression. As such, he should be well aware that these are the two most prominent examples of government intervention reaching extreme levels. Is it a surprise that they also happen to be the most dragged out economic downturns of the 20th century?

Just think back to the Works Progress Administration created during the Great Depression. If the program was such a stunning success- as revisionists will have you believe- then why did the Great Depression drag on for at least another 5 years? The WPA eventually became the biggest single employer in the country, which was good for those employed under the program since they received their wages regardless of the quality of their work. If full employment is the sole goal of any economic plan, then we might as well follow the model of Communist Russia.

If Krugman really thinks we're not paying higher taxes as a result of this reckless spending, I don't know what to say. His theory that government spending will boost economic activity, and thereby tax revenues, works only in theory. In order for that to hold true, the government's programs will always have to be more efficient than those of the private sector. The private sector is keen on risk, and thereby engages in projects that have a high likelihood of profitiablity. The government is just concerned with garnering votes by giving off the appearance of doing something, which leads to wasteful projects that would never have flown in the private sector. There is no doubt in my mind that we will pay the price very soon for the reckless spending of our government.

This post has been republished from Moses Kim's blog, Expected Returns.

Taxes And Economic Growth

An examination of presidential policy over the last 30 years indicates that tax cuts may not be the most effective means of stimulating economic growth in the United States. The data suggests that the tax increases signed by President Reagan and President Clinton did more to promote economic growth and recovery than any of the tax cuts signed since 1980. See the following post from Economist's View.

Do tax cuts spur economic growth?

Tax Cuts and Recoveries, by David Leonhardt, Economix: One big question about the 1983-84 economic boom (a boom I mention in my Wednesday column) is: Was it the tax cut?

Ronald Reagan signed a large tax cut in the summer of 1981, while the economy was in recession. Within a year and a half, the economy was booming. Conservatives, understandably, like to argue that the tax cut helped cause the boom.

I’m open to that argument. ... What’s unclear is how big an effect tax rates have.

In 1982, with the economy in the second part of its double-dip recession, Reagan signed a tax increase, meant to reduce the deficit. Here’s Bruce Bartlett, writing at Forbes.com:

According to a recent Treasury Department study, Ronald Reagan proposed the largest peacetime tax increase in American history as part of a budget deal to get the federal deficit under control. The Tax Equity and Fiscal Responsibility Act (TEFRA) ... took effect on Jan. 1, 1983.

During debate on TEFRA, many conservatives predicted economic disaster. They argued that raising taxes in the midst of a severe recession was exactly the wrong thing to do. ... Said Rep. Newt Gingrich, “I think it will make the economy sicker.” The Chamber of Commerce ... said it had “no doubt that it will curb the economic recovery everyone wants.”

Looking at the data, however, it is very hard to see any evidence that TEFRA had a negative effect on growth. Indeed, one could easily make a case that its enactment stimulated growth.

A little more than a decade later, Mr. Gingrich made the same argument about Bill Clinton’s tax increase. But ... the ... late 1990s expansion was the fastest of any in the past forty years.

Mr. Clinton’s successor, George W. Bush, signed a large tax cut during his first year in office — as Mr. Reagan did. But Mr. Bush never signed a tax increase to reduce the deficit. And growth in the Bush years was slower than in the Reagan years or the Clinton years, even before the financial crisis hit.

The history seems to suggest that tax cuts are not the most reliable strategy for spurring growth, at least in the United States, where top income-tax rates are not sky high.

But maybe readers can offer an analysis that explains this history and still makes the case for tax cuts as the main engine of economic recoveries. ...

Just one quick note - for those anxious about the deficit and eager to do something about it, the Reagan experience shouldn't be used as an excuse to start raising taxes too soon. The time will come when deficit spending is no longer needed to spur the economy and at that point we should reverse course, but we shouldn't make the mistake of 1937-38 when an attempt to balance the budget too soon in the recovery caused the economy to fall back into recession.

This post has been republished from Mark Thoma's blog Economist's View.

Is Government Spending Too Much On Pensions?

Pension and retirement benefits for public sector employees exceed the benefits received by their private sector counterparts, costing taxpayers millions every year. It is no surprise that California, Illinois and Pennsylvania -- all states that experienced big problems balancing their budgets this past year -- also have large numbers of public sector retirees receiving $100,000 or more a year in pension benefits. See the following post from The Mess That Greenspan Made.

Combine a burst housing bubble (and all the attendant vanishing tax revenues) with poor investment returns and a system that was unsustainable to begin with and you have the public pension system in California as reported by Bruce Bialosky at Town Hall.

The law gives the employee pension benefits of 3.0% of their final income for each year of service. It also made the 3.0% amount retroactive to the beginning of their employment period. That means if you work 20 years you receive a pension benefit equal to 60% of your final income. The problem was compounded by how they calculated the income on which to base the pension.

Everything including the kitchen sink adds to the final income level. Things such as auto allowance and bonuses boost the final number. If the employee did not use vacation pay or holiday pay for the prior 10 years that adds to the base salary to determine the income. Understanding that in most private sector jobs when you do not use your vacation, you lose your vacation, the ability to accumulate vacation time opens up the system for vast manipulation. Peter Nowicki, the Moraga Orinda fire chief, retired at age 50. His final salary was a whopping $185,000, but small compared to his annual pension benefit of $241,000. Making that matter worse, Nowicki was hired as a consultant to the fire department for an additional $176,000 per year -- on top of his retirement benefit.

Caution would probably be advised here as we have friends and relatives in both California and Pennsylvania who are retired from the state educational system, now benefiting from this sort of government largess (though not to the same degree as the fire chief above).

It's probably no coincidence that both states had big problems balancing their budget this year and would have had to let thousands of workers go if not for the many billions of dollars that came pouring in from Washington D.C.

Last I heard, there were more than 4,000 retired public sector employees pulling down more than a hundred grand a year in California with Illinois apparently not far behind as reported here. Over the years, cities such as San Diego have been rife with double-dipping like Chief Nowicki above, what does not appear to be an isolated case.

In Los Angeles County there are over 3,000 people receiving greater than $100,000 per year in pension benefits. In San Francisco, it was found that 25% of employees’ income spiked up over 10% in the final year of their work. The San Francisco grand jury found that amount cost the city $132 million.

Some would argue why not game the system? Let’s say you start working for the government when you are 30 years old and work for 25 years. Your final income with all the fancy calculations ends up at $120,000. That means you would receive $90,000 plus full health care benefits. You can either live on that very nice retirement or you are free to get another position. After all, being 55 years old, you are still in your prime earnings years. Where in the private sector are there comparative opportunities?
...
Private sector employees now receive less annual income than their public counterparts. Private sector employees will have to work well into their seventies to pay for these public sector employees’ retirement benefits which far exceed what the private sector offers. The public will, little by little, become aware of this upside-down arrangement.

The voters in California sent a strong message earlier in the year when they rejected the budget changes proposed by Sacramento and that's probably just the beginning (of course, lots of people are now voting with their feet in the Golden State).

It's funny that those who work in the public sector (at least the ones that I've spoken to on subjects such as this) have absolutely no appreciation for balancing budgets and making ends meet given the realities on the ground.

On the topic of "fixing" the public schools, one recent conversation went like this:

Retired teacher: "Doubling the number of teachers and cutting the classroom sizes in half is the only surefire way to provide consistently better education. You can't have 35 kids in a classroom and expect a quality education."

Me: "Where does the money come from to pay all these teachers?"

Retired teacher: "The taxpayers!"

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

Was It A Mistake Not To Nationalize Banks?

Joseph Stiglitz, past Nobel Prize winner and finance expert, maintains that the United States continues to experience economic struggles because the government avoided nationalizing the country's banks during the latest recession. He argues that if the administration had opted for this route, bailout monies would have been distributed more effectively and recovery might have occurred at a more rapid rate. See the following from Economist's View.

Barry Ritholtz:

Stiglitz: U.S. Paying for Not Nationalizing Banks, by Barry Ritholtz:

“We have this very strange situation today in America where we have given banks hundreds of billions of dollars and the president has to beg the banks to lend and they refuse. What we did was the wrong thing. It has weakened the economy and has increased our deficit, making it more difficult for the future.” -- Joseph Stiglitz

Any time Joseph Stiglitz calls out the government on their bad decision making, its worth reading:

“Nobel Prize-winning economist Joseph Stiglitz said the world’s biggest economy is suffering because of the U.S. government’s failure to nationalize banks during the financial crisis.

“If we had done the right thing, we would be able to have more influence over the banks,” Stiglitz told reporters at an economic conference in Shanghai Oct 31. “They would be lending and the economy would be stronger.”

Stiglitz has stuck with his view even after the U.S. economy returned to growth in the third quarter and as banks’ share prices climbed this year…

The U.S. government plans to alter the way that a similar rescue would be handled in the future. Draft legislation proposes that banks, hedge funds and other financial firms holding more than $10 billion in assets would pay to rescue companies whose collapse would shake the financial system.”

Why are we constantly governed by fools?

What I've said is that there is more than one route to get to the same destination, some of which are faster than others. Nationalization would have, I believe, led to a faster recovery. But even if that's not the case, even if the recovery would have gone at the same speed (I don't think it would have been slower), nationalization would have also allowed us to reach the same outcome with a different distribution of the bailout money, a distribution that would have been at least somewhat more acceptable to the public because it wouldn't have required giving so much of the bailout money to those who caused the problems.

This post has been republished from Mark Thoma's blog, Economist's View.

Luxury Real Estate For As Little As $1

Grand Estate Auction Co. has a unique way to sell high-end real estate - an auction with no minimum bid. To participate in the auction, investors must put down a refundable $50,000 deposit, but have a chance of walking away with a million dollar property for as little as $1. See the following article from HousingWire.

A five-bedroom, seven-bath luxury estate 25 minutes from Manhattan is set to hit the auction block on November 17 — with no minimum bid required.

This set-up, called an “absolute” auction, is meant to set the market value determined by a competitive bidding process. It eliminates minimum bids and reserves, meaning in theory the market could set the value at as little as $1, if only one lucky bidder shows.

But considering the amenities, that scenario is unlikely. The registered bidders, after all, are required to submit a refundable $50,000 cashier’s or certified check prior to the auction — a significant up-front commitment. The expectation, it seems, is for a strong bidder turnout.

The property going to auction November 17 boasts 10,000 square feet of estate on a five-acre lot located in Long Island’s Gold Coast community.

Unlike some of the historic estates and neighboring mansions — several of which are no more than ruins now — the property to be auctioned is a new construction. Built in 2003, the house features recreational and entertainment rooms, a gourmet kitchen, a three-floor elevator and a four-car garage.

The absolute auction is put on by Grand Estate Auction Co., which specializes in auctioning luxury homes and so far auctioned 250 properties typically in the $1.5m to $10m range.

“The benefit of an absolute auction is that bidders determine the true market value, which is the ideal way to sell and buy high-end residential real estate in today’s market conditions,” said Grand Estates president Stacy Kirk in a statement. “Bidders know the seller is committed to sell and have an opportunity to thoroughly examine the property prior to auction. Sellers avoid the hassles of unscheduled showings and cut onerous carrying costs.”

This post has been republished from HousingWire, a real estate news site.

Is Government Stimulus Spending For Jobs Wasteful?

There has been some concern over whether the government spending for jobs is justified by the results. To date the government has spent $150 billion dollars, while reporting 650,000 jobs that were created or saved, which roughly equates to a cost of about $230,000 per job. Glen Hill from The Street discusses this in the following post.

Jobs are being created, or at least saved, thanks to President Obama's stimulus spending, and the administration seems pleased to take credit for 650,000 state and local positions after burning through $150 billion.

That's it? That's the best we can get for $150 billion? I'm starting to understand the stimulus naysayers because when you do the math, it's costing an average of more than $230,000 to save a job with this program.

I seriously doubt we're creating six-figure income jobs. Granted, the investment is intended to create long-term employment opportunities, so the cost per job should diminish over time if the companies keep all the stimulus-related positions.

There should also be a compounding impact as companies in the supply chain boost employment to keep up with potential growth by the recipients of government grants.

At least that's the hope. For now, all we know is that the government is spending more than four times the median household income of $52,029 to create or save jobs.

The Obama camp is quick to point out that this initial job assessment covers only a small part of the $787 billion in planned spending. The White House puts the stimulus-job tally at 1 million when other spending is factored in and says it expects to see 3.5 million jobs credited to the stimulus package when all is said and done, according to a report on CNN.

Looking at the data available so far, the number of positions created or saved directly by federal contracts is only about 30,000 to date, according to the official government stimulus Web site, Recovery.gov.

So the rest of the stimulus jobs must be coming from the trickle down impact of spending at the state and local level.

More details on stimulus jobs are expected to be released this afternoon.

So far, it's a pretty lame PR effort by the Obama camp. If they are going to defend this spending program against increasing attacks by Republicans who think the money is being wasted, then they'll need to find some better examples of success.

Sifting through the reams of individual reports on the stimulus tracking Web site, you'll find some big amounts going to individual companies in various states that didn't help with employment at all.

According to the fancy map on the Recovery.gov Web site, $165.9 million went to Lockheed Martin(LMT Quote) in Colorado that didn't save or create any jobs, $57.6 million went to Northrop Grumman (NOC Quote)in California that didn't create or save any jobs and $373.6 million went to Sanofi-Aventis (SNY Quote)in Pennsylvania that didn't save or create any jobs.

That said, there are many smaller awards such as $70,808 that went to the Housing Authority in the city of Robert Lee, Texas and is credited with 5 jobs.

I'm hoping that the data on the government Web site is simply incomplete because my unscientific review produced very disappointing results.

Maybe the White House needs to create a few jobs itself to get a better tracking system.

This post has been republished from The Street, an investment news and analysis site.

Why More Government Stimulus Is Needed Now

The third quarter of 2009 witnessed an economic growth rate of 3.4 percent, nearly three-fourths of which was driven by consumer spending. The announcement that consumer spending decreased by 0.5 percent in September, however, indicates that economic recovery may be less robust than analysts had previously predicted. Mark Thomas explains why more government stimulus is needed now in the following post from Economist's View.

I have something at Room for Debate (written last Friday) on the the extent to which the recent improvement in GDP growth can be attributed to the stimulus package, and whether more stimulus is needed ("Did the Stimulus Work?").

The link is to the much shorter version that appears on the NYT site. Here's the wordier, unedited version:

A Shaky Start, by Mark Thoma: With the news yesterday that output grew by 3.5% during the third quarter of this year, it appears we may finally be seeing the green shoots that signal the onset of the recovery. But what is driving the growth in output, what will it take to sustain that growth, and how long will it take to make up for the lost output and employment we experienced during the crisis?

A look beneath the growth numbers announced yesterday answers the first question. Increased consumer spending accounted for 2.4% of the 3.5% increase in growth, and much of the increase in consumption was driven by the Cash for Clunkers and other government stimulus programs. Today’s announcement that consumer spending fell by .5% in September now that the Cash for Clunkers program has ended raises serious questions about the sustainability of the growth we are seeing. Without further help from the government, which has clearly aided the economy despite what you may have heard from naysayers, will the private sector be able to sustain growth on its own?

One of the big dangers we face is that we will declare victory too soon and begin raising interest rates and cutting back on stimulus before the private sector has recovered the ability to sustain growth without help from the government. I believe that we need more stimuli right now to maintain the growth we are seeing, particularly given how far the recovery in employment lags behind the recovery in output, but adding to the stimulus package is a political non-starter. However, amid the worries about the growing deficit and fears of inflation that make further stimulus political poison, we can and must maintain the stimulus that is already in place.

The need to at least maintain the stimulus we have, if not increase it, is enhanced by the fact that even though a 3.5% growth rate is far better than the negative rates we have seen recently, it’s not nearly enough to make up for the output we lost during the crisis in a reasonable amount of time (Paul Krugman says that at this rate, “we wouldn’t reach anything that feels like full employment until well into the second Palin administration”). The recovery period from past recessions were associated with output growth rates of 6-7%, enough to resume the level of growth that existed before the crisis, and to make up for losses in a reasonable amount of time. If those losses had not been recovered, if the level of output had been permanently lower instead of just a temporary deviation from its long-run trend, then employment and income would have also been permanently lower. That is not a desirable outcome in any case, and in the current recession the weakness in employment markets combined with the stagnation in middle class incomes even before the crisis began makes such an outcome even more undesirable. Unfortunately, at a rate of 3.5% -- which is only slightly above the long-run trend rate of growth -- it will take many, many years to make up for losses and return to the long-run trend, and any further slippage in growth would make the losses permanent.

The recovery we are seeing is being driven, in large part, by government stimulus programs. The fact that growth is weaker than we need to fully recover losses in a reasonable amount of time, and the even slower recovery we are seeing in employment markets, indicates that the stimulus programs already in place are too small. Thus, even though it’s unlikely to happen, the economy could use more help than it’s getting, but in any case it’s imperative that we avoid cutting back too soon.

The signs are encouraging, and at some point the private sector will be able to sustain growth on its own, but it’s far too soon to declare victory.

This post has been republished from Mark Thoma's blog, Economist's View.

China Is Becoming The World Leader In Gold

Last year, China produced over 9 million ounces of gold, one million ounces more than South Africa and more than any other country. This, combined with the Chinese government’s recent public statements encouraging its citizens to buy gold, could quickly cause China to become the world leader in the gold market. See the following post from Daily Wealth by Jeff Clark.

As you read this, the Chinese government is doing an extraordinary thing... something nearly unheard of in the modern world.

It is encouraging citizens to put at least 5% of their savings into precious metals.

The Chinese government is telling people gold and silver are good investments that will safeguard their wealth. After last year's meltdown in the stock market, people believe it. After all, Chinese citizens don't receive government retirement money... and they don't have company pension plans like people in many other countries do.

This is why folks in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver (they especially like silver because it's cheaper per ounce).

The Chinese attitude toward gold and silver is a striking contrast to the American attitude right now. I don't recall a TV or radio ad from my congressman or President Obama encouraging me to buy gold or silver. Does your bank sell silver bars? Are gold mints popping up in your neighborhood? Are any of your friends, family, or coworkers scrambling to buy precious metals?

In spite of a few ads on television and satellite radio, buying gold and silver in the U.S. is still largely seen as a fringe-group activity. That's not the case in China. And in the big picture, there are three distinct trends occurring in China today that many in the Occidental world are not paying attention to.

First, look where China stands as a gold-producing nation.



In 2008, China produced 9,070,000 ounces of gold, exceeding all other countries. Further, its production continues to rise, while many of the top-producing countries are in decline.

Second, China had the lowest per-capita gold consumption of any country over the past half-century. This year, it is widely expected that Chinese demand for gold will surpass that of India. In other words, they'll also become the world's No. 1 retail buyer.

Third, the Chinese government has been using its foreign exchange reserves to buy gold – a lot of it – and doing so on the sly. This past April, Chinese officials made a surprise announcement that they had been secretly buying gold since 2003, increasing their gold reserves by 76% to 33,886,000 ounces. The Chinese government now owns 30 times the gold it held in 1990. And China is believed to be a leading candidate to buy some or all of the 12.9 million ounces the International Monetary Fund says it will sell.

But all this production and all this buying isn't enough...

Even though China is the world's seventh-largest holder of gold, gold comprises but a tiny fraction of its reserves, as shown in the table below.



What would happen to the gold price if China increased its gold reserves to just 5%? What about 10%? To overtake the U.S. as king of the gold hill, it would have to buy all the gold held by the governments of France, Italy, and Germany combined. Can China really do any of that?

At $1,000 gold, to push China's gold holdings to 5% of reserves would take $55.3 billion; to 10% would cost $144.4 billion; to be the world's top gold dog would run $227.6 billion.

Chinese reserves are approaching $2.3 trillion, of which almost 70%, or $1.6 trillion, are denominated in U.S. dollars. The cost to become the world's biggest holder of gold would be a pittance compared to the amount of money China has available. In other words, money is not a problem.

Combining the country's massive holdings of dollars and the very real likelihood those dollars are going to lose much of their value, the motivation to buy tangible assets is urgent.

Further, keep this in mind: China's reserves continue to grow. Therefore, the country must continue buying gold (or consuming its own production) just to maintain the small gold-to-reserves ratio it has, let alone increase it.

In addition to the government buying precious metals, Chinese citizens will continue gobbling them up, too. Demographics alone tell us why.

Government statistics show the average urban household in China has about US$1,300 in disposable income. Multiply that by the number of urban households in China and you come up with roughly $36 billion in available capital.

According to precious metals consultancy CPM Group, about 9.5 million ounces of gold will be turned into coins this year (including "rounds" and medallions). At $1,000 gold, that's $9.5 billion, or only about one-third of the capital available in China.

The number is more striking for silver: Total coin production this year is expected to hit 35 million ounces, equaling $615 million or just 1.7% of the available capital in China. Of course, a lot of Chinese people want cars and refrigerators, etc., but it won't take much of a shift of this capital into gold and silver to have a major impact on the global retail precious metals market. It may already be under way.

And long-term projections show the demographic trend won't slow down: The middle class in China is expected to increase by 70% by 2020. So over these next 10 years, more Chinese and more money will be coming into the precious-metals markets, all at a time when inflation is almost certain to be high, adding to gold and silver's appeal. Couple this with China's long-standing cultural affinity for gold and you have the makings for a potentially life-changing gold rush.

If I were a crime detective, I'd say China has the motive, means, and opportunity to push gold and gold stocks much higher.

This post has been republished from Daily Wealth, a contrarian investment site.

Las Vegas Real Estate Still Struggling

The widely proclaimed rebound in the housing market has not spread to the Las Vegas housing market. As a result of the recession’s effects on the building and gambling industry, home prices in Las Vegas continue to decline. See the following post by Tim Iacono from The Mess That Greenspan Made.

During the 2009 housing market "rebound" (a rebound that may or may not prove to be sustainable), there has been one "non-participant" out in the Nevada desert - Las Vegas.

As noted here the other day, while the 19 other cities in the Case-Shiller Home Price Index have posted one or more month-to-month gains, with prices in some areas now more than ten percent higher than the lows seen in late-2008 or early-2009, home prices in Sin City just keep going down.

According to this story in the Las Vegas Sun, it doesn't look like that's about to change.

The sagging economy will weigh on the Las Vegas real estate market and boost foreclosures on residential and commercial properties, according to a panel of local business executives.

The group, composed of a lender, a bankruptcy attorney and a consultant, said the Las Vegas recovery will lag not only the nation but competing markets such as Phoenix.

Michael Shustek, CEO of Vestin Group, a real estate lender and asset manager, said many residential foreclosures have been limited to low-end homes, but a wave of foreclosures at the higher end of the market is coming.

After flying high a few years back, Las Vegas and Phoenix have been in something of a competitive death spiral (again, see the latest multi-colored chart for details), though the latter seems to be mounting a rebound with three consecutive monthly price gains since May.

Neither should be proud.

Based on a starting index value of 100 in January of 2000, the Las Vegas index stood at 106 as of August while Phoenix could only muster a 108.

Yes, that would be six percent and eight percent gains, respectively, after almost ten years.

Unfortunately for Las Vegas, the trend is still down.

The key to predicting the real estate market is what’s happening in the economy and in gaming and construction — two industries that were hit hard, said Gregory Garman, an attorney with the law firm Gordon Silver. Las Vegas isn’t Detroit, but it’s in a tough spot when it comes to absorbing real estate, he said.

“We have high unemployment and two industries that are not anywhere close to the verge of recovery and a stagnant if not shrinking population base,” Garman said. “When you look at those things weighing against us, it is going to (take awhile) until some of this (housing) inventory gets absorbed.”
...
“Look at how many condo towers you are seeing empty,” Shustek said. “I did the lending on Towers 1 and 2 at Panorama. We sold out. Tower 3 has 15 closed units in that whole tower. It is frightening out there.”

Wells said that homebuilders can’t compete with existing homes selling for $70 a square foot and that the lack of job growth will hinder that recovery going forward.

The experts predicted that even the addition of 12,000 jobs at CityCenter, slated to open in December, by itself won’t fuel enough additional economic growth or create enough jobs to offset the tens of thousands of jobs Southern Nevada has recently lost.
“We have 180,000 unemployed in the state,” said William Wells, managing director of RSM McGladrey, a business consulting and accounting firm. “That is the part I am concerned about. Where is (job growth) going to be to put more rooftops out there and fill some of these homes.”

Wells predicts the housing market will suffer through what he calls the “W” effect with prices going up, down and back up again. The concern is what happens with the Federal Reserve and need to raise interest rates to keep inflation under control. That will keep a lot of buyers from the market, he said.

“I think the other thing we have to put in perspective is when is the residential market back. How do you define ‘back’?” Wells said. “Back to what, because it is not going to achieve the unreachable numbers we had in 2003 to 2006. I think people are coming to the realization that there is a new baseline. That was something that was unsustainable, and going forward you will have to manage your life a little differently.”

Home prices in Las Vegas are now down 55 percent from the peak reached in August of 2006.

It wouldn't be surprising if 2006 prices are not seen for another twenty years, maybe longer.

If you think that's far fetched, consider that, from current levels, average annual gains of four percent per year would see a return to those lofty levels in 22 years, whereas, three percent gains would take 29 years...

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

Consumer Spending Hits A Speed Bump In September

Many experts believe the recession is past, but this optimism is not reflected in consumer spending. Unemployment concerns are still plaguing consumers and the persistent lack of public confidence in the economy is reflected by this month’s drop in consumer purchases. See the following from Expected Returns.

From Bloomberg, Consumer Spending in U.S. Declined in December:

Spending by U.S. consumers fell in September for the first time in five months after the government’s auto-rebate program expired.

The 0.5 percent decrease in purchases matched the median estimate of economists surveyed by Bloomberg News and followed a 1.4 percent jump in the prior month, Commerce Department figures showed today in Washington. Incomes were unchanged, while the savings rate climbed.

Stagnant wages and concern over mounting unemployment are causing confidence to wane, raising the risk that consumers will retrench in coming months as government assistance programs run out. The report also showed inflation was lower than the Federal Reserve’s long-term projection, indicating the policy makers can keep rates low.

The persistently weak unemployment picture and stagnant wages help explain the "surprising" slide in confidence in October and the drop in consumer spending. With the recession now apparently over, shouldn't consumer spending be rising dramatically?

The Keynesian economists that champion the usage of debt to stimulate economic activity using esoteric, but flawed, arguments about stimulating "aggregate demand" are not focusing on the tremendous debt overhang that is inherent in our system.

Hangover Effect

Autos in October probably sold at a 9.85 million pace, down from an average 11.5 million rate in the third quarter than reflected the boost from ‘cars-for-clunkers,’ according to the median estimate of analysts surveyed by Bloomberg News. Purchases averaged 13.15 million in 2008.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, fell 7.2 percent last month after increasing 6.7 percent in the prior month.

So essentially, even with all this government stimulus, consumer spending has been flat the past couple of months. In a genuine recovery, the government wouldn't even have to think about stimulating the economy since private economic activity would, by definition, be growing. The only thing that is growing right now is government spending, and I will continue to say that this trend is not sustainable.

This post has been republished from Moses Kim's blog, Expected Returns.