Economic Warnings From Niall Ferguson and Nassim Taleb

Niall Ferguson is a professor of history at Harvard University and is also on the faculty of the Harvard Business School. This indicates that he has successfully jumped through the most rigorous of academic hoops. Because he writes voluminously and well on topics related to national finance, he is often asked to speak at high-level business conferences.

Ferguson recently was asked to write an article for London's Financial Times. He began his article with a comment on the present state of debate over fiscal policy in the West. He said that the debate is depressing. I could not agree more.

He quoted the famous aphorism regarding the restored king of France after the defeat of Napoleon in 1815. The king was an heir of the Bourbon family. It was said that the family forgot nothing and learned nothing.

The same could easily be said of some of today's latter-day Keynesians. They cannot and never will forget the policy errors made in the US in the 1930s. But they appear to have learned nothing from all that has happened in economic theory since the publication of their bible, John Maynard Keynes's The General Theory of Employment, Interest and Money, in 1936.

So, what the Keynesians never forget is their version of the policies of the Great Depression, which has never had much to do with the economic facts.

In its caricature form, the debate goes like this: The Keynesians, haunted by the spectre of Herbert Hoover, warn that the US in still teetering on the brink of another Depression. Nothing is more likely to bring this about, they argue, than a premature tightening of fiscal policy. This was the mistake Franklin Roosevelt made after the 1936 election. Instead, we need further fiscal stimulus.

What happened in mid-1936 was a stabilizing of the monetary base, as the chart reveals. This flattening of the base continued through 1937. It was not a fiscal policy error that brought back the second phase of the recession. It was Federal Reserve policy, which was to keep price inflation at bay. Think "the FED under Bernanke, 2006–2007."

Then he made an important point, one that has never gotten into the history textbooks or the economics textbooks.

When Franklin Roosevelt became president in 1933, the deficit was already running at 4.7 per cent of GDP. It rose to a peak of 5.6 per cent in 1934. The federal debt burden rose only slightly – from 40 to 45 per cent of GDP – prior to the outbreak of the second world war. It was the war that saw the US (and all the other combatants) embark on fiscal expansions of the sort we have seen since 2007.


Today's war-like deficits are being run at a time when the US is heavily reliant on foreign lenders, not least its rising strategic rival China (which holds 11 per cent of US Treasuries in public hands); at a time when economies are open, so American stimulus can end up benefiting Chinese exporters; and at a time when there is much under-utilised capacity, so that deflation is a bigger threat than inflation.

Ferguson pointed to previous periods in which governments ran huge deficits that were financed by foreign investors. But these were weak national governments. He mentioned Argentina and Venezuela. The common term is "banana republics," but he neglected to use it. He did remind us what happened.

The experiments invariably ended in one of two ways. Either the foreign lenders got fleeced through default, or the domestic lenders got fleeced through inflation. When economies were growing sluggishly, that could be slow in coming. But there invariably came a point when money creation by the central bank triggered an upsurge in inflationary expectations.

He identifies Krugman as a Keynesian who fails to understand that fiscal deficits change people's expectations. They figure out what has been done to them by Keynesian politicians. Then they figure out what is going to happen to their futures.

According to a recent poll published in the FT, 45 per cent of Americans "think it likely that their government will be unable to meet its financial commitments within 10 years." Surveys of business and consumer confidence paint a similar picture of mounting anxiety.

He believes that we are fast approaching the end game.



Link -
http://www.marketoracle.co.uk/Article21454.html
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War finances, without the war, well at least not a major one, yet?

Btw, the US Debt to GDP ratio, may well already exceed 100%?

I say, may well, because their stats are flimsy, to put is mildly!

The Mighty US Banking System?

Last Report dated - 17/07/2010

Banks gone this week - 5

Banks Gone last week - 7

Banks gone since last report - 12

Banks gone this month, so far (July) - 22

Banks gone last month (June) - 8

Total Banks failed, so far, in 2010 - 122

Total Banks Failed in 2009 - 140

FDIC Link -
http://www.fdic.gov/bank/individual/failed/banklist.html
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The next 12 months will see many more US Banks fail!

The Seven Perils of Economics (Cont)

Additional thoughts on real world economics:
We also need to compare aged based cohorts across economies with different demographics rather than totals and averages.

The average wealth and income of 50 to 55 year olds by quintile across countries is more relevant and meaningful than an average wealth and income comparison of a number of countries with significantly different demographics and at different stages of development.


At the risk of alienating some readers who might now agree with the comments above, we have also reached the time when it is necessary to take a longer term economic analysis (say 10 years or more) into account:

1. increasing supply/demand imbalances of higher grade, cheap to extract resources leading to higher prices of basic physical and energy inputs

2. the likelihood of the increasing demand for resources in many exporting countries (eg oil and Mexico) leading to more pronounced increased scarcity for import reliant countries

3. the impact of continuing global warming (we have recently had the hottest 12 consecutive months in modern times) on agricultural self sufficiency and water security in the face of growing populations and

4. the potential for increasing fragmentation of society in wealthy countries as the well off in emerging countries become increasingly more wealthy than even the lower middle socio-economic class in developed countries.
Link -
http://seekingalpha.com/article/218111-the-seven-perils-of-economics?source=email
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I recommend theRichard Koo video -

http://www.businessinsider.com/lecture-us-japan-richard-koo-2010-7

As the author (Paul Hanly) said -

The time for narrow technical analyses has passed and must give way to broad holistic approaches that recognise the differing natures of mature economies with older, slower growing populations compared to those of the emerging economies and the debt fuelled growth of the recent modern period since 1960

.

Recession Hits Golf Clubs

Membership in golf clubs is shrinking, causing a “death spiral” of reduced revenue and poorer upkeep and service.

Clubs across the sunniest parts of the U.S. are suffering, with Myrtle Beach, South Carolina—known as “Golftown, USA”—losing 25 of its 125 courses in less than four years.

In Phoenix, eight golf courses have gone through either foreclosure or bankruptcy since the financial crisis in 2008.

Florida’s courses could be hit even harder thanks to the oil spill.

There are 3 million fewer golfers than there were in 2005.

Up to 15 percent of the nation’s private clubs are facing serious financial problems.

Aging Baby Boomers created a golf boom in the 1990s, and now the market is correcting itself.
Link -
http://www.thedailybeast.com/cheat-sheet/item/recession-hits-golf-clubs/market-c...
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A Micro view of a Macro Demographic issue!

These Four Giant U.S. States are About to Go Bankrupt

Four states are teetering on the edge of failure. These four states make up over 25% of the United States' GDP and are home to over 25% of its population. Their tax revenues have plummeted, and they can no longer afford the spending programs politicians have approved over the past years, even decades.

Technically, there's no legal process by which states can declare bankruptcy.  When our country's bankruptcy code was formed, apparently the concept was unthinkable.

So states just muddle on, borrowing more and more to pay their debts (isn't that technically a Ponzi scheme?) while politicians split along party lines so that no one has to ever be held responsible for the dreaded tax hikes or spending cuts. Everything can just sputter along…until it can't.

Yesterday, California Governor Arnold Schwarzenegger declared a fiscal state of emergency to force lawmakers to pass a state budget more than one month overdue. The state, which is the 8th-largest economy in the world, faces a $19 billion deficit. They resorted to paying bills with I.O.U.s last year, and it looks like they're not afraid to do it again.

If things got bad enough, and California just stopped making debt payments, it's likely the world's financial system would get swept up in the inevitable chaos. But no one in the bond community is ready to concede that there's a possibility the state would default. At least not yet.

The unspoken hope is that Washington D.C. would swoop in at the last moment to bail out both debtor and creditor. But the tide may be shifting. Washington may be distancing itself from this implicit guarantee.

Illinois Governor Pat Quinn recently said that during his trip to Washington for the National Governors Association meeting it was made clear to all governors present that they should be fully prepared for less money to come from the federal government than they were hoping for.

And if that's the case, you  don't want to be anywhere near these 3 other ticking time bombs:
Illinois -- By now it's pretty much common knowledge Illinois is broke. And if its politicians aren't all corrupt, they're at least spineless.

Because the state government refused to either raise taxes or cut spending, Illinois simply stopped paying the roughly $4.7 billion in bills it owes to public schools, rehabilitation centers, child care providers, the University of Illinois and other unsecured creditors as of the beginning of July.

Lawmakers also decided to just "stick a pin" in $3.7 billion worth of unfunded pension payments until after November elections. Apparently there's no need for incumbents to take a stand on where they think the $3.7 billion should come from. Borrow it at rates so high that interest payments will add an additional $1 billion to the bill? Or just take it out of the general fund and give the middle finger to every non-pensioned citizen who relies on public schools and state-sponsored social services?

New York -- Before the Senate adjourned for its summer vacation, it did manage to put together a spending plan. Unfortunately, it failed to come up with the funds to pay for it. The end result is a $9.2 billion deficit and projections that the country's third-largest state by population could run out of cash by September.

Regardless, E.J. McMahon, director of the Empire Center for New York State Policy, says, "The state's 2010-2011 budget, like its deficit-ridden predecessor, shapes up as a flimsy house of cards that could begin to collapse before the year is out."

Michigan -- Still reeling from the loss of tax revenues generated by the once mighty Ford (NYSE: F), GM and Chrysler, Michigan's lawmakers have been crossing their fingers that the U.S. Congress will cough up $560 million in additional federal money to help them fill their budget deficit.  In 2008, Congress passed a bill that made higher Medicaid payments to states especially hard hit by the Great Recession, states just like Michigan.

Unfortunately, it looks like the federal legislation that would have extended payment through 2011 will die before reaching the floor of the U.S. Senate.

Without the $560 million in federal money, Michigan faces ugly cuts to programs covered by its general fund — including universities, health care and tax revenue-sharing payments made to local governments. And if a budget is not approved by October 1, the state faces a total shut down of governmental operations.

These states have the most pressing problems, but there will be plenty of others that will feel the pain from the Great Recession for years to come.
Link -
http://www.investinganswers.com/a/these-four-giant-us-states-are-about-go-bankru...
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These are medium to large economic players, in their own right, California (for example) would rank in the top 10 GDP, if it were a country, not a state.

If, as I suspect will be the case, the Global share markets & Economies turn south again, later this year, then the Gordian knot will tighten around these and other US states, the US Federal gopvernment & other nations around the world!

7 Headwinds for the U.S. Economy

1. Small business has few incentives to hire and plenty of disincentives to trim payroll further.

2. The U.S. money supply is not rising enough to fuel strong growth.

3. The job market is dominated by temp and free-lance/contract work.

4. Financial insecurity is rising. American households are caught in a vise: even as wages stagnate and long-term unemployment erodes household incomes, the assets such as home equity which provided a cushion have also fallen. Medical and education costs are also rising, further squeezing households.

As a result, the risk of "experiencing a major economic loss" is climbing. Those households which can save money have powerful reasons to sock away a cash cushion to weather possible emergencies such as job loss and medical out-of-pocket expenses, and few incentives to spend all their disposable income.

According to the report, median household wealth decreased by a whopping 19% from 2007 to 2009. Coupled with the poor job market, this has changed Americans' perceptions and planning. When asked to predict their financial behaviors once the economy recovers, 48% say they plan to save more, 31% say they plan to spend less and 30% say they plan to borrow less.

All of those trends suggest there will be significantly less consumer spending in the years ahead--a sobering prospect in an economy which relies on houshold spending for much of its GDP.

5. The bedrock of middle-class wealth, the home, is still declining in value in much of the country. Sales have fallen, and outside of a few pockets driven higher by cash investor buying and shrinking inventories, the housing market remains weak.

Foreclosures are still rising at a record pace, and the gap between what Americans lost in the housing bust and what they've recovered in value in the past year is in the trillions of dollars.

6. Households have gone from borrowing freely from their home equity to paying down debt. This process is called deleveraging, and this chart illustrates how equity extraction via mortgage refinancing has plummeted. The total amount Americans owe on their mortgages actually fell last year as households paid down debt.



The net result is American households no longer have the extra money to spend that they did in the heyday of the housing boom. Now they are devoting more money to reducing debt, which means there will be less money spent by consumers and thus less sales tax collected.

7. Taxes will rise, reducing household income and spending. While it appears that only the highest-income households will see a rise in their Federal tax rates as the Bush-era tax cuts expire, local and state taxes are on the rise, as are fees such as traffic fines which act just like taxes even if they avoid the dreaded label of "tax increase."

In Philadelphia, property taxes are slated to rise a hefty 9.9%. Fairfield, New Jersey,passed an 11% increase in property taxes. These are not isolated incidents, but examples of a nationwide increase in local taxes.

The legislature in Kansas recently raised the sales tax by 1% to 6.3%, a move which mirrors the widespread state and local rush to raise sales taxes across the board.

Despite these large tax hikes, total revenues in many areas are flat or declining. Tax revenues in Nebraska are still falling, foiling forecasts, and Galveston County in Texas saw tax revenues fall by 17%.

In addition to raising property and sales taxes, local governments are also jacking up parking rates, traffic fines and a multitude of other fees and levies. As I reported last October, some of the most outrageous examples are traffic tickets and related court costs.

Given that all these substantial increases in taxes and fees have barely reversed the decline in local and state tax revenues, local authorities will undoubtedly press even harder for additional taxes to compensate for lower spending and housing valuations. This trend to ever-higher taxes and feed will have long-term negative consequences on household finances, local government revenues and consumer spending.

It's called a positive feedback loop: the less households spend, the less taxes the local governments collect, causing them to raise taxes, which leaves households even less to spend, and so on.Link -
http://seekingalpha.com/article/218525-7-headwinds-for-the-u-s-economy?source=em...
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As previously raised, there is now a Global De-leveraging process under way and I believe that Aus-terity programs &/or actions directed at further eroding the Publics DISPOSABLE INCOME, is bound to exacerbate a rising Economic slowdown.

Btw, I think the articles last sentence should have read, "negative feedback loop", not positive!

The Mighty US$

Last Report dated 17/07/2010

US$ Index (basket of Currencies: @ 80.32 (Last Report - 82.56
http://www.goldseek.com/quotes/charts/usdollar/usdollarindex24hour.php

Euro - US$: @ 1.328 (Last Report - 1.293)
AUD$ - US$: @ 0.9182 (Last Report - 0.8689)
AUD$ - GBP: @ 0.5760 (Last Report - 0.5679)
AUD$ - Euro: @ 0.6915 (Last Report - 0.6720)
http://www.bloomberg.com/markets/currencies/fxc.html

Gold - @ US$1,205.30 (Last Report - US$1,188.20)
Oil - @ US$80.70 (Last Report - US$76.01
DOW - 10,654 - (Down 21 @ Friay close) (Last Report - 10,098)
All Ords - 4,586 (Up 1 @ Friday close) (Last Report - 4,437)
http://www.bloomberg.com/?b=0

Last 5 years DOW -
http://finance.yahoo.com/echarts?s=%5EDJI#chart3:symbol=

THERE was movement at the FED, for the word had passed around, That the US$ was an old Regret and its value had long since passed away
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The US$ index has continued its recent decline against most major currencies, whilst the Australian $ spiked and is now set for another charge at parity with the US$.  

Gold continued range trading, whilst the Oil price rose again on the back of the lower US$.

And, the UPS, DOWNS & VOLATILITY continue everywhere!

The scene is set, nearly time to raise the curtain, turn on the lights & make the action call, but not quite, but we are getting closer?

Ex Dame Pansi wrote on Aug 7^th, 2010 at 1:54pm:


As John Williams (from Shadow Stats) put it, in the article "Times That Try Our Souls" on the Future/s thread, "I think the odds are extremely high that we'll see it break within the next year. I would put it six months to a year, outside."

And, as for poor old (?) saint Nick, he does get a bad wrap, but I doubt we can't look past ourselves, for this little lot!