Bearish News

Good Tech Ticker clip featuring Peter Boockvar explaining why any deflation/disinflation will inevitably lead to more easing and ultimately inflation. I discussed this at length last year in Flaws in the Deflation Case.

Jesse gives us this hilarious depiction of Goldman Sachs’ role in the Greek debt crisis. According to Bloomberg, Goldman played a significant role in helping Greece hide its debt from the EU.

Here’s an excerpt from Jesse’s accompanying piece, Simon Johnson: Goldman Faces Special Audit and Possible Ban in Europe:

Regular readers will be aware of our thesis that the American Wall Street banks have become dominated by a culture of compulsive sociopaths who are incapable of reforming or restraining their greed. Like all addicts, they push the envelope looking for a new high, emboldened by each successful scam, the weakness of regulators, and the craven support of politicians, going further and further until at long last they go one step too far, with spectacularly destructive results.

Goldman Sachs may have reached that point. And as also suggested here, the rebuke may be coming from European and Asian nations who become weary of the extra-legal antics of the rogue American banks.

In the interests of harmony, the Europeans may once again bow to US pressure and continue to permit the Money Center privateers to roam through the interational financial system wreaking havoc, as they have been doing through the domestic US economy. It will be too bad if they do.

This is in no way an excuse for the Greek government. But what Simon Johnson is saying in this essay below is that Goldman is not only not blameless, but is enabling, complicit and perhaps even presenting the opportunity for market manipulation and fraud to other parties. Typically they like to ‘package’ these scams and take them from one customer to another, so that greed meets need, as a corrupting influence. It is no different than a bank engaging in money laundering in support of the criminal activity of another organization.

As always, Jesse’s latest is well worth the read. As is the Simon Johnson piece he references.

It’ll be interesting to see how Goldman stock reacts tomorrow when markets reopen after a long weekend. It should be an ugly day for GS, which in this bizarro stock-world means it will probably close up 5%. As Tyler of ZH says, good news is good, but bad news is better.

Sorry for the light posting lately, been on vacation and occupied with some other things. Should be back to normal soon.

An analyst at Deutsche Bank created some buzz the other day when he said that the PIIGS’ (Portugal, Ireland, Italy, Greece, Spain) debt crisis could be a “dress rehearsal” for a U.S. one.

It makes for a catchy headline, but the funding crisis in America will play out differently than the PIIGS’ bloc does. The key difference is our ability to print money and devalue the dollar. QE is off-limits for EU members, at least. Bernanke would probably call that an advantage, but I’m not so sure.

Either way, it is nice to see some light shined on America’s debt problem. It’s not pretty, and the sooner we deal with it the better. From BusinessWeek:

The cost of insuring against U.S. and U.K. debt defaults may rise in the same way as it has for so- called European peripheral nations including Greece and Portugal, Deutsche Bank AG said.

‘The problems currently faced by peripheral Europe could be a dress rehearsal for what the U.S. and U.K. may face further down the road,’ Jim Reid, a strategist at Deutsche Bank in London, wrote in a research note today.

The cost of insuring against U.S. and U.K. debt defaults may rise in the same way as it has for so- called European peripheral nations including Greece and Portugal, Deutsche Bank AG said.

‘The problems currently faced by peripheral Europe could be a dress rehearsal for what the U.S. and U.K. may face further down the road,’ Jim Reid, a strategist at Deutsche Bank in London, wrote in a research note today.

I  heard the “dress rehearsal” line on Bloomberg yesterday, during a Niall Ferguson segment. Scroll down for the clip, it’s among the better mainstream coverage of the global-debt-crisis coverage.

Worse than Greece?

The fundamental outlook for PIIGS is bad. Greece has gotten the lion’s share of attention lately lately. But you could argue the same or worse for the United States or U.K.

Zero Hedge recently escalated the acronym-hoopla by adding the U.K., Turkey, and Dubai to create STUPID. Regular readers objected to the absence of the U.S., expanding it to STUUPID.

America’s situation isn’t pretty, and may be worse than PIIGS’ or STUPID’s long-term. In the Bloomberg clip I mentioned earlier, Niall Ferguson points out that in 2009 America’s deficit-to-GDP was 10.2%,.compared to Greece’s 8.7%. Spain and Ireland were both slightly worse, with deficit-GDPs of around 11%. I included the Ferguson clip at the bottom of this post, there are some interesting charts comparing the health of various economies.

Cutting Back vs. Ramping Up

Greece is currently implementing “draconian” budget cuts, while America continues to spend like mad, focusing exclusively on the immediate future. It’ll be interesting to look back in 5-10 years, and see how the contrasting strategies played out.

It’s The Total Debt

America’s official public debt-GDP number may not be at nauseating levels yet (around 85% of GDP), as pundits like Krugman and Delong are fond of reminding us. But even the official US numbers are ugly, particularly the recent spike as shown by this chart:

While the U.S. isn’t the worst offender on the chart, there are a number of problems with these official numbers. First, these comparisons don’t factor in some very real liabilities, including trillions of potentially-worthless Fannie and Freddie assets. Jonathan Weil of Bloomberg explains:

Excluding Fannie and Freddie, the national debt held by the public is about $7.9 trillion. With them, it exceeds last year’s $13.2 trillion gross domestic product. Even the geniuses at Moody’s Investors Service are warning that the country’s AAA rating might not last. No country can owe more than its yearly productive output for long without giving up its accustomed lifestyle and influence.

Those numbers also only include federal debt. America’s local governments, companies, and citizens are all leveraged to the hilt. This chart is at least a year old, but it’s telling:

Liabilities Ignored, Baby Boomer Crunch Looms

Cooked government books also ignore entitlement program shortfalls and unfunded future liabilities. Take a look at Social security, which,  for the first time in 25 years, is collecting less in taxes than it brings in. That wasn’t supposed to happen until 2016. Bruce Krasting has a good writeup here.

The outlook for social security, and all other entitlement programs, will only get worse as Baby Boomers retire. When Boomers, an outsized age-demographic, were in their earnings prime, social security and other programs had large surpluses. But instead of putting that money aside to pay for the inevitable trend reversal, we padded our deficits with it. It’s gone.

Depending on which numbers you look at, and what timeline you use, America has unfunded liabilities of anywhere from $30 trillion to $99 trillion. The higher number comes, surprisingly, from the head of the Dallas Federal Reserve, Richard Fischer (from a 2008 speech):

For the existing unfunded liabilities to be covered in the end, someone must pay $99.2 trillion more or receive $99.2 trillion less than they have been currently promised. This is a cold, hard fact

It’s inevitable, and borderline cliche, but America’s years of gluttony will inevitably lead to a day of reckoning. Somebody’s bound to get screwed, and most people will have to adjust to a lower-quality of life for a while.

Holders of U.S. debt will likely take hits if/when QE 2.0 begins. Baby boomers themselves are getting crushed by low interest rates. How is a retiree supposed to live off 1% CDs? Bernanke will keep rates down as long as he can, because it’s incredibly profitable for banks. But it’s going to be brutal for those who rely on fixed income.

The system can eventually fix itself, but only if we let it. Eternal monetary easing and govt support is a recipe for a subpar economy, indefinitely. Analysts are also seeing an increased risk of a prolonged period of stagflation.

I’ll end with this quote from Jesse,who has a way with words:

The banks must be restrained, the financial system reformed, and balance restored to the economy before there can be any sustained recovery

Here’s that Niall Ferguson segment from Bloomberg. Skip to 4:35 for the Deutsche Bank “dress rehearsal” quote and some nice graphs.