Mayday! Mayday! Mayday!
Baltic Dry Index. 1269
LIR Gold Target by 2019: $30,000. Revised due to QE.
"Although it's true I'm pretty clever, and I'm something of a rascal, but all that's well hidden under this always easy and natural disguise of behaving like a fool."
“Helicopter” Ben Bernanke, “The Bernank”, with apologies to Don Quixote.
Since the week ahead hosts the EU – IMF meeting in Athens to try to figure out how to prevent Greece defaulting on its debt now that bailout plan A has gone horribly wrong, there will be plenty of time to resume euro trashing in the week ahead, as good money chases after bad money in the ever more sickly European PIIGS. This weekend, therefore we focus on America, and how it is insanely intent on collapsing its currency, still the world’s only reserve currency used in the trading of oil. Fiat currency now isn’t working at as intended. In many parts of the world it has generated severe inflation and its twin, social disorder. Elsewhere it has generated the casino financialised gambling economy, where all other sectors of the economy are subordinated to the elite in the central banks inner circle of cronies. The taxpayers are used to mop up the losses. A hollowed out economy can’t get back to sufficient growth necessary to generate sustainable jobs. Bad things lie ahead for fiat currency later this decade, but that’s a story for another day. Today, once upon a time in a faraway prosperous land, between the two shining seas, came a plague of ogres, banksters and great vampire squids, all doing “God’s work” to the great surprise of the formerly free serfs.
"I don't see how you could be righting wrongs...because you've turned me from right to wrong, leaving me with a broken leg."
Don Quixote.
Running in the red: How the U.S., on the road to surplus, detoured to massive debt
By Lori Montgomery, Sunday, May 1
The nation’s unnerving descent into debt began a decade ago with a choice, not a crisis.
In January 2001, with the budget balanced and clear sailing ahead, the Congressional Budget Office forecast ever-larger annual surpluses indefinitely. The outlook was so rosy, the CBO said, that Washington would have enough money by the end of the decade to pay off everything it owed.
Voices of caution were swept aside in the rush to take advantage of the apparent bounty. Political leaders chose to cut taxes, jack up spending and, for the first time in U.S. history, wage two wars solely with borrowed funds. “In the end, the floodgates opened,” said former senator Pete Domenici (R-N.M.), who chaired the Senate Budget Committee when the first tax-cut bill hit Capitol Hill in early 2001.
Now, instead of tending a nest egg of more than $2 trillion, the federal government expects to owe more than $10 trillion to outside investors by the end of this year. The national debt is larger, as a percentage of the economy, than at any time in U.S. history except for the period shortly after World War II.
Polls show that a large majority of Americans blame wasteful or unnecessary federal programs for the nation’s budget problems. But routine increases in defense and domestic spending account for only about 15 percent of the financial deterioration, according to a new analysis of CBO data.
The biggest culprit, by far, has been an erosion of tax revenue triggered largely by two recessions and multiple rounds of tax cuts. Together, the economy and the tax bills enacted under former president George W. Bush, and to a lesser extent by President Obama, wiped out $6.3 trillion in anticipated revenue. That’s nearly half of the $12.7 trillion swing from projected surpluses to real debt. Federal tax collections now stand at their lowest level as a percentage of the economy in 60 years.
Big-ticket spending initiated by the Bush administration accounts for 12 percent of the shift. The Iraq and Afghanistan wars have added $1.3 trillion in new borrowing. A new prescription drug benefit for Medicare recipients contributed another $272 billion. The Troubled Assets Relief Program bank bailout, which infuriated voters and led to the defeat of several legislators in 2010, added just $16 billion — and TARP may eventually cost nothing as financial institutions repay the Treasury.
Obama’s 2009 economic stimulus, a favorite target of Republicans who blame Democrats for the mounting debt, has added $719 billion — 6 percent of the total shift, according to the new analysis of CBO data by the nonprofit Pew Fiscal Analysis Initiative. All told, Obama-era choices account for about $1.7 trillion in new debt, according to a separate Washington Post analysis of CBO data over the past decade. Bush-era policies, meanwhile, account for more than $7 trillion and are a major contributor to the trillion-dollar annual budget deficits that are dominating the political debate.
As Congress prepares this week to launch a high-stakes battle over whether to raise the legal limit on borrowing, the analyses offer a clearer view of the drivers of the debt — and of the difficulty of re-balancing the budget without new tax revenue.
More.
America's reckless money-printing could put the world back into crisis
Last week, Ben Bernanke suggested that the US base interest rate will stay close to zero for an "extended period". It's been there since December 2008.
By Liam Halligan 5:15PM BST 30 Apr 2011
Traders took these words to mean that the Federal Reserve won't hike rates until the first few months of 2012 at the earliest.
Bernanke also pledged to do whatever is required to keep America's economic recovery on track – confirming that the second programme of "quantitative easing", or QE2, would be completed. These two related announcements – the "reprieve" and the "sugar rush" – sent Wall Street into renewed spasms of synthetic joy.
In the real world, US growth is slowing sharply. Annualised GDP rose just 1.8pc during the first three months of 2011, down from 3.1pc the quarter before. America remains mired in sovereign, commercial and household debt.
----So the Fed will keep on "printing" virtual money – at least for now. By the end of June, it will have purchased $600bn (£363bn) of longer-term Treasuries, with the US government effectively buying its own debt from funds created ex nihilo. That's on top of the original $1,750bn (£1,048bn) QE scheme, launched in late 2008.
----Bernanke's utterances caused gold to jump another 2pc. Silver – known as "poor man's gold", another "inflation hedge" – spiked 6.5pc. But the real story was the plunging dollar. Against a basket of five major global currencies, the US currency fell sharply and is now at its weakest since July 2008. The Fed's "real broad dollar index", a 26-currency composite and adjusted for inflation, is testing levels not seen since 1979.
Yet still Tim Geithner puffed-out his chest and reaffirmed America's "strong dollar" commitment. "Our policy has been, and will always be, as long as I'm in this job, that a strong dollar is in America's interest," the US treasury secretary said.
That's total nonsense, of course – seeing as a weaker currency boosts US exports and lowers the value of America's external debt. Geithner's words are not only disingenuous, but insulting to America's creditors and trading partners. In fact, Washington's constant berating of Beijing for "currency manipulation" is looking more and more like a diversion tactic.
----America's currency weakness is based on fundamentals including its vast, and upward-spiralling, $14,000bn debt – and that's just what's "on the books". Nothing material is being done to address this massive problem. The unspoken assumption among politicians on both sides of the aisle is that America can just "monetise" its liabilities by continuing to debase the currency.
So the Fed's actions are undermining the dollar precisely because that's what the White House wants. At the same time, sophisticated investors are exploiting ultra-low US rates by borrowing cheaply in dollars and switching the proceeds to currencies where returns are higher. This "carry trade" is flooding foreign exchange markets with US currency – weakening the dollar further.
More.
"To tell you the truth...you've told one of the most novel tales ... anyone in the world has ever thought of, and the way you told it, and then ended it, is something never to be seen, and never ever seen, in the course of a lifetime, though I expected nothing less from your remarkable powers of reasoning."
Turbo Tim Geithner. With apologies to Don Quixote.
GI.
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