Candidate Ron Paul talks prohibition, the Constitution, the DSK arrest, liberty, money, and counters more than a few “free market” myths in this interview. Dr. Paul remains collected, and seems fired up about his Presidential run. Worth watching:
To the delight of economic skeptics, Jim Rogers recently said the dollar was a “total disaster”, and managed to directly call out Chairman Bernanke as clueless in the same speech.
From Bloomberg:
The U.S. dollar is going to be a “total disaster” in the long term because of the country’s position as the world’s largest debtor and the policies being pursued by Federal Reserve Chairman Ben S. Bernanke, according to investor Jim Rogers.
The Chinese yuan is likely to be a “safe” currency, although it is difficult for investors to buy, Rogers, the chairman of Rogers Holdings, told a conference in Edinburgh.
“The situation is getting worse and I expect to see severe problems in the U.S.,” Rogers said today. “Dr Bernanke doesn’t understand economics, he doesn’t understand finance, he only understands printing money and we can’t quadruple the amount of money in the next slowdown.”
Jim Rogers is a real man’s Warren Buffett. Just saying…
Exhibit B: US dollar purchasing power chart 1971-2011:
I’ve been thinking a lot lately about how the dollar’s fall is likely to play out. The world is far bigger, richer, and healthier than it was during the last big currency shakeup. In the 1930′s, when the Pound Sterling lost its status as #1 reserve currency, the world had just 2 billion people with an avg life expectancy in the 40s (today it’s 69.2 – which is good in a societal sense, yet very bad in a govt-entitlement sense).
Its citizens are also saddled with many times higher debt-per-capita. Gold and silver-backed money has disappeared. Hence, the currency wars and economic turmoil we’re starting to see.
Importantly, the global financiers are (arguably) more thoroughly-entrenched in political/biz power structures than ever before. And they will have their way for now, like it or not.
Read Simon Johnson’s 2009 piece, The Quiet Coup, if you haven’t yet. Unfortunately, things have gotten worse since, during what will likely be seen in retrospect as the only real opportunity for financial reform this time around. Too late, Obama, if you care. So we are all-but guaranteed another, bigger crisis in the next few years. All anyone has done so far is kick the can down the road, in the direction of a muddy ditch.
EU v. Dollar, QE 2.80
The euro should provide quite an interesting challenge to the dollar over coming years, as the currencies vie for the title of “least-shitty” reserve option.
Germany has tough decisions to make, such as how best to slaughter the EU debt-beasts. Orchestrating a bond default of this magnitude, particularly the part where they try to convince Euro banks to eat losses, will not be pretty. But it’s going to happen (unless the populace as a whole agrees to be become debt serfs, and dedicate their entire lives to grinding away on 20% + debt.
No, that will not happen, which is why we’re seeing rising unrest. This transition can be orderly, or it can be ugly. But debt will, somehow, be restructured. If future programs look like that oh-so-horrible Irish package, with taxpayers and pensioners bearing the brunt for banks/financiers, we could see a revolution or two in the West. Those Greek riot pictures you’ve seen? Pretty bad.
But picture such an event in a large American city like Detroit, my dad’s hometown. Or any number of large struggling American cities. When food stamps, unemployment, and medicare stop providing the desired level of assistance, residents in these areas should expect things to get bad for a while.
In the US, the only decision I see Bernank and Co. making is how best to sell QEx to the public. As long as we have a dovish captured president, and Dudley, Geithner, Bernanke, Yellen, and other bank-loyal Bob Rubin types remain in power, that won’t change. Unrestrained, these folks’ proteges should be orchestrating round 28 of Quantitative Easing in 2025.
I suspect and hope that America’s crazy fiat experiment will be stopped before then. QE6 is where I think things will start to get really nasty (if we get there). By that time, the rampant, in-your-face, undeniable-despite-vigorous-CPI-massage-style-inflation will force even those such as Pulitzer-Prize winning economic doveologue David Leonhardt to question the Bernank’s wisdom (when he does, probably time to sell gold).
But for now, the Fed is determined in their mission to destroy the dollar and inflate. Pushed on by lazy politicians who don’t want to cut taxes or slash spending (numbskulls who voted recent leaders in, myself included, share the blame. Ron Paul 2012 ), and by banks who stand to reap enormous profits from their TBTF status.
Why will QE3, 4, and 5 appear?
Don’t worry, the Bernank assures us. More money-printing won’t be necessary*, (unless prices start to fall). Then, well… we’ll have to reevaluate. BTW, prices tend to fall when we stop printing money, and that inevitably leads us to print more money. It’s one of those vicious-cycle things, like Fat Bastard.
The QE brand will only last so long, so a new name and acronym seem inevitable. Maybe the powers that be could arrange a stock-split of sorts, 10:1. Make it a more publicly-digestible QE2.80?
QE 2.80 – or some acronym far more ridiculous and abstract – might fool a few hundred million people, and it would certainly look better for the Feds than a headline like this: US Central Bank Surprised For 27th time in a Row, As QE28 suddenly seen as necessary to prevent imminent and super scary deflation.
It’d be just like Citigroup’s reverse-split, but fwd (by the way, how is that $.01 per-share div a “dividend reinstatement” after a 1:10 reverse split, Vikram? Gotta love clumsy financial obfuscation..)
Whatever name QE3 takes, I think we should all agree ahead of time to call it that, regardless of the acronym spin.
Back to EUR/USD
My gut says that long-term, the Euro will stay stronger than the dollar (I don’t trade FX, and am but a lowly metal-owning sideline currency-heckler).
John Taylor said in January of this year that at some point in 2011, the USD and Euro should trade at parity (with the Euro even going lower). Of course, he’s right when he says that the market was/is overly optimistic on Europe. But it’s at least as bad in the US, long-term, and markets are starting to realize that. EUR is up 7% this year against USD.
Both economies have their strong and weak areas.
Germany – Europe’s largest economy by far – is quite healthy. California, New York? Not so much. Texas, PA, NJ? Pretty bad too. And the US Federal Govt? Likely worse off than Greece, long-term.
Almost all states in the US have big deficits, incredibly underfunded pensions, stagnant wages, rising prices, and very slow growth (likely negative in real terms). There are some bright spots, like Wyoming and North Dakota. But they make up a tiny portion of the total economy. The US manufacturing base has been exported, and will take time to rebuild.
Germany, meanwhile, is the EU’s top dog. And they have strong views on the necessity of controlling inflation.They also tend to focus on real economy and manufacturing, as opposed to America, where we have a big ol’ soft spot for finance/banking, expensive health care, and the military-industrial complex. Lots of good companies, but they are currently drowned out by TBTF crud. Financial-sector profits are back to 40% of ALL US profits, by the way…
Neither economy is perfect. But if I had to bet on a socialist-leaning economy with a strong manufacturing base and sound(er) monetary policy (GEUrmany), or the socialist-corporatist land of TBTF banks and reckless military spending (US), I pick the former.
Europe will inevitably get hit hard when Greece, Ireland, Portugal, and others go through their bond-default pain. But these things happen in economies, and economies rebound surprisingly fast from such trauma (see: Iceland, Russia, Asia). Europe’s future is cloudy, like America’s. But on a purely economic basis, I’d say the EU is likely to emerge from the mess before the US.
China will be tenting its fingers, a la Mr. Burns, in the corner, deciding how to play its increasingly sweet-looking hand; economically, politically, and militarily. There will be bumps along the road, like brewing housing-bubbles and inflation issues, but power is steadily shifting their way. They have over $3 trillion in foreign reserves, a growing domestic economy, and the luxury of letting their currency appreciate, if/when they want to.
China is an aspiring superpower snatching up resources across the globe. Notably, they’re doing it all in a very peaceful way. Sure, they have human rights issues at home, but thus far they haven’t even bombed a single country! Seems like a good sign for the world’s superpower heir-apparent.
The world has never seen such a currency war before, and it should provide observers with entertainment for years to come. Hopefully not decades.
Chart via DollarDaze.org.
Updated/completely-revamped 5/14/2011 9:30pm.
Excerpt from a report by David Rosenberg, Chief Economist & Strategist Gluskin Sheff
HERE’S A LIST OF TEN IDEAS (SEND YOURS IN!)
1. An energy policy that truly removes U.S. dependence on foreign oil (shale case, coal, nuclear).
2. A complete rewrite of the tax code that promotes savings, investment, and a revamp of the capital stock. Cut tax rates, eliminate loopholes and costly tax breaks. Tax consumption, promote savings and investment. That is crucial. But it will take political courage (ask Brian Mulroney).
3. A credible plan that reverses the runup in the debt to GDP ratio. This includes not just on-balance sheet items but new rules governing entitlements too. We need delineation of the future of Fannie and Freddie if there is any … they became wards of the government nearly three years ago and there is still no clarification on this file (slightly more important than these periodic consumer spending gimmicks that have surfaced over the past few years).
We need a complete rewrite of social contracts and a reversal in sacred cows that have been created over the years that are completely unaffordable. Plus, people are not going to learn to live within their means if our politicians continue to set a bad example. The act of dipping into Social Security, incentivizing companies who are already cash-rich to spend more on new equipment and extending a Bush tax cut that always had a 10-year expiry date at the expense of the already severely strained public purse was political expediency at its worst.
4. A massive mortgage write-down by the banks — a Jubilee of biblical proportions — that provide much-needed equity to upside-down homeowners.
5. A creative strategy to put people to work instead of paying them to be idle — having nearly half of the unemployed ranks out of work for over 15 weeks and a 25% youth jobless rate is unacceptable at any level.
6. Tort reform. The only way to rationally bring down health care costs to more manageable levels.… they became wards of the government nearly three years ago and there is still no clarification on this file
7. And from six — use whatever proceeds they can save to enhance their education skills, especially in the sciences and mathematics where the U.S.A. is sliding down the global scale.
8. Financial sector regulatory reforms that actually have some teeth.
9. Change tax policy to free up the hundreds of billions of dollars of corporate cash sitting in reserve in overseas accounts — bring this money home!
10. Our Republican friends may not like this too much but in Canada, we understand the importance of immigration inflows and the U.S.A. should be doing more on this front to stimulate its long-run growth potential. This is where Japan’s decade of lost growth became two decades but its decision to resist immigration rule changes is more cultural in nature. The U.S.A., like Canada, is already extremely diverse. But as economists, what goes into economic growth is both simple and complicated.
The simple part is merely identifying the two ingredients: growth in the population (more specifically, the part of the population that is working) and productivity (what most of the other nine ideas listed above would attempt to generate). But the dependency ratio is working against the U.S.A. and a smart immigration policy would help at least stem the runup.
David Rosenberg’s Economic Reports are featured at Gluskin Sheff.
Bruce Krasting is a 25-year Wall St. vet, and runs one of my favorite finance/econ blogs.
#1 – If you were advising President Obama, what would your #1 economic action item be? Ignore political viability, if possible.
On a “big picture” basis I would set an agenda that was clearly moving in a direction of unwinding many/all of the emergency measures that were introduced in 08. For confidence to be restored we have to get the sense that the crisis is behind us. There is nothing that can be done “tomorrow” that can magically restore home values and reduce unemployment. Bernanke will try to save the day with QE-2, but it will not work any better than QE-1 did. A short term benefit at most. Same with fiscal policy. We can have another stimulus and borrow another $1 trillion. That would give us a few quarters more of anemic growth. But after that we would fall off the shelf when the life support ends. Our policies appear to me to be a bridge to no-where. A smooth ride till the end of the ramp and then a crash.
I think the Europeans have it closer to “right” than we do. They are moving in the direction that I think is better if one is looking out five years and asking, “What do we want to look like?” We are headed in the direction of Japan. We will have 1% growth (disaster) and debt to GDP of 150% (death).
But you asked a narrow question. What would I do?
I think we do need a stimulus. But it has to be different this time. We need the private sector to pick up the slack. So let’s give them a chance. I want a one year (18 months?) Payroll tax holiday. That tax is currently 12.4%. For 2011 that tax will be equal to about $700 billion. A very big drag. I want to cut SS by 60% during the holiday. I want the reduction to be shared by workers and and their employers. I would have a ratio of 60% for the workers and 40% for the employers. I want to put $400b in the hands of the private sector. This is money that does not even get collected by D.C.. So the government can’t spend it. I believe that the 150 million American workers will make the best use of that extra $240B. They will spend some of it and they will save some of it. The companies that get a break will also spend it. I would require that the savings that the employers get have to be re-invested.
BUT. This has to be PayGo. This can be done. I estimate that a ~4 year cut of SS benefits for those who are getting checks now but also have taxable income in excess of ~$200k PA is required. I call this the Bill Gates/Warren Buffet tax. These guys do not need the extra 1500 a month SS is paying them. This is a means test. It taxes wealth. I do not like that, but it is necessary. We have to raise revenue.
The percentage of people that this would affect is small. Therefore it is politically “sale-able”. It is a significant change of the rules of SS. But those changes would be temporary. To attempt to make this “fairer” I would give those that lost benefits a tax credit. That tax credit would be available to offset (dollar for dollar) any federal estate taxes that would be due at death. What would this do? It would put more “wealth” back into the hands of the next generation. Everything we do robs from the next generation. This has the opposite impact. It puts more in the hands of our children.
Some would object to this. But my guess is that Bill and Warren and many others who would lose benefits would be happy to do so. Those that would be impacted by this have a great stake in America. These are the ones who have the most to lose if we fall into a debt spiral or a depression. They are getting the money, but only after they are dead.
Trust me. A $400b reduction in PR taxes would be a very effective stimulus. It would work. The economy would stabilize. But it must be paid for. If we just borrow and spend we will have accomplished nothing. Making it PayGo would instill confidence.If confidence is restored markets will improve and interest rates will return to more normal levels. Those that lost SS benefits would rejoice at that result.
Disclosure: I would lose my benefits if this plan were implemented.
#2 – You have written extensively about Social Security. Which aspect of this program do you feel is most misunderstood? How much of a threat are baby-boomers to entitlement programs?
Hmmm. Most misunderstood? There are so many aspect of this that are misunderstood.
The $2,500,000,000 Trust Fund has to be at the top of the list. I typed all the zeros to show just how big the number is. $2.5 Trillion. Hard to think of.
Some say there is no money or assets in the TF. That it was robbed by some prior administration. Many refer to it as a ponzi scheme. Just a fictional accounting scam.
Those on the extreme other side look at this as massive pile of AAA Treasury bonds that will mature and be available to pay scheduled benefits for the next 25 years or so. They think that SS is sound and nothing need be done about it.
Both of these views are wrong in my opinion. The bonds in the TF will be paid on time. They are legally just as sound as those held by the Chinese central bank. We exclude these debts when evaluating our current Debt/GDP ratios. We are doing ourselves a disservice, this is real money that is owed.
But to honor these debts means that the Debt Held By the Public will increase $ for $. That can’t and will not happen. Yes there are real assets, and no they can’t be used without a (my word) disastrous consequence to the bond market. There is a limit to what can be sold. I think we are dangerously close to that limit today. Adding in another 2.5t will make us lose our AAA and our financing cost will go up. We will become Greece.
On the Boomers. They have been the problem for decades. This demographic bulge is probably our most significant medium term challenge. When the boomers were born they created a housing boom. That has not stopped until 2007. 2008 is the first year of the boomers getting to 65 folks. That is not a coincidence. The mcmansions, second and third homes are coming up for sale now. The boomers are downsizing. This will go on for many years.
While the boomers did pay a lot of taxes and funded the surpluses in SS they are now going to start costing us big time. The aging of our population is accelerating. We still have a decade to peak.
If the economy were growing by 4-5% we could afford this transition. But that is the least likely thing to happen. Because of the boomers, we will be lucky to grow at 1.5%. Should that be the case the boomers will sink the economy.
Resources are are scarce. Allocations will have to be made. It will not be pretty. We have the risk of “age warfare”. We may be faced with the choice, “Who do we protect?” The health and education of people 25 and younger, or the health and well being of those over 80. If we are faced with triage we will have to support the former over the latter.
Socially, we may be looking at a bad end for the boomers.
I am a boomer.
#3 – Reports of under-funded pensions at corporate, state, and federal levels are widespread. Are you concerned?
Not my area of expertise. I read the reports as you do. I am certain they are right. We are on a train wreck with this. The problem is that there was an assumption about how quickly assets would grow (8%) and and how big future contributions will be. Both are wrong. The lines are crossing in public and private PFs all over the country.
Cuts will have to be made. But these were promises that were made in ink, so it will not be easy. To a very significant extent this is another boomer problem. I will repeat from above:
Socially, we may be looking at a bad end for the boomers.
#4 – Could you briefly sum up your thoughts on U.S. equities?
Briefly? What a tough assignment.
There are today some excellent investment opportunities in the capital markets. That will be the case every day for the next ten years. But I don’t know what they are and if I did I would not share them. Those that “share” are just selling their book. I am convinced of one thing:
THE “BUY AND HOLD” IS DEAD. DEAD. DEAD….
Thanks to Bruce for taking the time. He’s one of the more level-headed and knowledgeable finance bloggers out there, and has the real-world experience many of us lack.
