ECONOMY
Economists Vs. Americans
Sudeep Reddy
The Financial Trust Index has been tracking public sentiment toward the financial system for more than three years. And sentiment isn’t good.
The most recent survey found that just 23% of Americans say they trust the US financial system. That’s as low as the earliest months of the economic crisis. And 62% describe themselves as angry, or very angry, about the nation’s economic situation — the highest level since March 2009.
For its latest quarterly survey, the FTI took its responses from average Americans to a series of economic assertions and put them up against the responses from a panel of economists. The results are striking.
Top marginal tax rate: On the factual assertion, “Permanently raising the federal tax rate by one percentage point for those in the top income tax bracket would increase federal tax revenue over the next 10 years.” Economists: 100% agree with that statement (regardless of their political orientation); Americans overall: 66% agree (50% of Republicans; 80% of Democrats).
Eliminating tax deductions: “Eliminating tax deductions on mortgages would lead to better financing by individuals.” Economists: 85% agree; Americans overall: 35% agree (41% of lower-income households agreed, but just 23% of higher-income households).
“Buy American” provisions: “Mandates that Federal government purchases should be ‘buy American’ have a significant positive impact on US manufacturing employment.” Economists: 10% agree; Americans overall: 75% agree.
Predicting the stock market: “Very few investors, if any, can consistently make accurate predictions about whether the price of an individual stock will rise or fall on a given day.” Economists: 64% strongly agreed; Americans overall: 54% agreed. Survey respondents with at least a college degree answered more closely to economists—70% agreed. And among people who make more than $75,000 a year, 63% agreed.
Living In A Qe World
James Blanco
The degree to which the world’s central banks are printing money is unprecedented, writes Blanco, who discusses the balance sheets of the ECB, the Fed, Bank of Japan, Bank of England, Bundesbank, Banque de France, People’s Bank of China and Swiss National Bank.
The size of each respective balance sheet, in its local currency, is exploding higher. Most are still making new all-time highs. If the basic definition of quantitative easing is a significant increase in a central bank’s balance sheet via increasing banking reserves, then all eight of these central banks are engaged in QE.
In US dollar terms, the combined size of these eight central banks’ balance sheets has almost tripled in the last six years from $5.42 trillion to more than $15 trillion, and is still on the rise.
QE is an expanding of balance sheets via increasing bank reserves. It does this by purchasing fixed income securities in order to lower interest rates. This makes fixed income securities relatively unattractive, and pushes investors out on the risk curve, increasing purchases of riskier assets such as stocks, and pushing them up in price. These higher prices should lead to a wealth effect and increased economic activity.
Massive central bank involvement in the markets risks returning us to a centrally planned economy. It’s as if every public company has the same chairman—Ben Bernanke. How do central banks pull back trillions of dollars of money printing without throwing markets into a tailspin? No one knows.
When central banks go too far, expanding balance sheets will no longer be viewed in a positive light. The heads of these central banks will no longer be revered, but rather looked upon as eight Alan Greenspans that caused a financial crisis.
The tipping point between balance sheet expansion being bullish for risk assets versus bearish is impossible to know. Given the growth rate of central bank balance sheets around the world over the past few years, we might not have to wait too long to find out. Enjoy it while it is still bullish.
Investors Fear Mounting Losses In Portugal As Second Rescue Looms
Ambrose Evans-Pritchard
A recent report says Portugal would have to run a primary budget surplus of over 11% of GDP a year to prevent debt dynamics spiraling out of control, even in a benign scenario of 2% annual growth.
Yields on Portugal's 5-year bonds surged to a record 18.9%, reflecting fears that the country will need a second rescue from the EU-ECB-IMF troika. Three-year yields hit 21%.
Europe must stop bickering over ideology and act. The G20 bloc will have to chip in to ensure the crisis does not engulf Italy and Spain, and EU nations may have to absorb some losses on Greek bonds if Greece's debt is to stay below the target level of 120% of GDP by 2020.
Portugal is the only EMU country that has not seen confidence return since the ECB flooded the financial system with cheap 3-year loans. Premier Coelho said his government is delivering on the austerity program and will not ask for more time or more money. However, the economy is tipping into brutal recession as cuts begin in earnest, and risks a Greek-style downward spiral.
Citigroup and the IMF both forecast a contraction of Portugal’s economy; this after slashing estimates for Spain and Italy. The IMF said Portugal's debt would not be sustainable in a "low-growth scenario." Some funds have had to sell Portuguese debt since S&P cut the country's credit rating to junk.
Investors are worried that a second bailout by the Troika will reduce private bondholders yet further towards junior status, implying larger losses if Portugal needs restructuring. Portugal’s haircut would need to be 56% to put the country back on a sustainable path if long-term growth was 2%, or 46% if growth rose to 4%.
The IMF expects Portugal's public debt to peak at 118% of GDP next year. However, combined public, household and corporate debt is nearer 360%, much higher than in Greece. Private firms are already struggling to roll over external debts.
While Coelho has embraced reform, the IMF says the economy is still afflicted with "pervasive structural rigidities.” The current account deficit was still 8% of GDP last year, and economists fear that Portugal's "internal devaluation" within the Eurozone has barely begun.
Inflation And Price Trends 1920-2012
Mark Lundeen
Ever since the Fed was created in 1913, prices have been either inflating or deflating. Prices rise as artificial demand created by currency printing is focused on a single segment of the economy – housing, for instance – and growth is created as the extra currency spreads throughout the economy.
Inflation drives the valuation of gold and silver to some extent, but only after a financial bubble has been inflated elsewhere in the economy. So the original flow of inflation has little or no impact on precious metals' valuation, until the original inflationary bubble begins to deflate.
Today, precious metals have a long way to go before their bull market comes to an end. Millions of dollars have been injected into the economy, inflating massive bubbles in financial assets worldwide. To date, policy makers have maintained these bubbles, so their deflationary effects on financial assets, and the inflationary consequences in gold and silver, have been largely contained. When the Fed loses control, however, rising interest rates will result in panic buying of real assets with no default risk. Until then, believing that precious metals are near their bull market top is nonsense.
The media is totally ignorant of what drives precious metals prices. They believe that war, or economic or natural disasters are the prime movers of gold and silver, but this is not true. What drives their price is Washington's reckless management of the US dollar for domestic political purposes. It's no accident that after each of Washington's 20th century gold defaults (1934 and 1971), gold entered a sustained bull market.
Currently, Washington is risking the US dollar by 1) bailing out the Eurozone and its banking system, and 2) recklessly expanding currency in circulation. This means the future looks particularly bright for both gold and silver.
Most people today have no idea of the benefits gained by linking currency creation to the available supply of gold in the economy. One solid benefit is that the gold standard kept the money supply free of economic parasites, which is still the major objection of politicians, bankers and academics to using gold as money.
Printing dollars doesn't produce wealth, though it does allow a select few to consume more than they produce, at the expense of the many. Private sector increases in salaries and wages, in response to rising consumer prices, will never compensate workers for losses inflicted on them by our corrupt monetary system. But that was the whole point of taking the dollar off the gold standard.
