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Monday, August 16, 2010

China chooses to order from Column "B", "C" and "D"; Column "A" not anymore

If you use US dollars, get paid in dollars or need to borrow like the government at a rate of 3.5 Billon per day you need to know what the Chinese think.  This past Friday I wrote a missive on why what the Chinese Dagong Global Credit Rating rating, who is not recognized by Wall Street or Washington was much more important than they are given credit.  So lo and behold in a Bloomberg article dated today(8/16) “China Favors Euro Over Dollar As Benanke Alters Path”. The article is interesting, dear reader, and never mentions Dagong Credit but the message is along the same lines as the Chinese ratings agency’s claims against US debt.  The Chinese have been key buyers of US Debt which has allowed the Government to do many things over the past few years including the stimulus bill totaling around $800 Billion.

Now the Chinese are following their own credit agency’s advice and taking action to diversify their debt holdings. The consequences of this action put the US at a disadvantage on an economic footing as well as potentially a more serious national security issue. For now, let’s just deal with the economics of this situation. The inability of the US to sell bonds to the Chinese will cause funding problems in the future, unless we revert to more of an austerity path, which in this writer’s opinion based upon looking at those in power as well as several decades of past history is unlikely.

In some respects while the Chinese are looking out for their own interests by diversifying they may also be trying a roundabout method of forcing US austerity by not funding government bloat and harebrained schemes. Additionally, this could be viewed as an attempt by the Chinese to force Bernanke to the carpet to assure themselves that their assets are protected.

It is difficult to know the true motivations of the Chinese because their economic system, thought patterns and closed nature of government and markets are alien to those of us in the West. As stated in my prior article we in the West tend to look at the rest of the world in an ethnocentric manner, meaning we believe that everyone is just like us. In other words their market participants act and react the way we do, which is patently false. For example, here in the US people in the investment industry tend to view something like gold as a barbarous relic, while people in India and all over Asia view it as wealth(a store of value). Who is right? That is a debate for a different day, but what is clear is that your background and culture color your perceptions and even your expectations and therefore your reactions.

What is clear is that the pie in which the US sells its debt has shrunk and the number willing takers is decreasing since their competitors are viewed more attractive by one of the largest consumers of the debt. The US needs to sell too much debt to be able to rely on the periphery buyers. In my opinion this is has the potential to set up for a much larger quantative easing then most expect. I do believe that Mr. Bernanke will fire up the helicopters to drop money from the sky and buy up whatever pork Washington will produce. He is more concerned with protecting the banks than the people of the US so this will ultimately lead to the US Dollar being sacrificed on the altar of monetization, since the Chinese have basically said “No Mas”.

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Friday, August 13, 2010

Who cares what the Chinese think?

Earlier this year Dagong Global Credit Rating agency, a little known entity located in Bejing, downgraded US Government debt and gave it a negative outlook.  Should we be listening to the message that Dagong Global Credit is putting forward? Here in the US the SEC has standards for assessing NRSRO’s (Nationally Recognized Statistical Rating Organizations) which are detailed on their website, and Dagong Global Credit is not one of those recognized agencies. In the mean time the “Big Boys” S & P, Moodys and Fitch still rule the roost, regardless of the fact that their ratings were of little value prior to, during or post this entire turbulent market period beginning in 1999 to the  present. Even so the “Big Boys” retain the ability to rank investment vehicles for creditworthiness and are still taken seriously after all that has transpired. One of the jokes in my family is that the best job in the world has to be weather forecaster as they are constantly wrong, yet manage to be taken seriously and keep their jobs; well now we can add working for SEC recognized credit rating agencies to that short list.

So should we be taking Dagong seriously? As of this moment Dagong is the National Enquirer of rating agencies. We do not really know what methods they use to derive their rankings, but is that truly critical given the track record of the “Big Boys”? The arguments that Dagong Global Credit puts forward do seem logical regarding the US and other countries debt out look, however, many will argue that the agency is just an extension of China’s government and meant to forward and bolster their vision and agenda. To this I would counter that the “Big Boys” have moved from their original mission of actual ratings to being cheerleaders for the Wall Street and Washington agendas. So while it is normal for either agency to “talk their book” one has to look at the facts. It appears that the “Big Boys” are in a concerted effort to gloss over problems in the system and promote a positive outcome, which is what we all want, at least those of us in the US. On the other hand, Dagong Global is coming at this from an outsider’s perspective of one who holds a significant amount of US debt so you would think that they would not want to risk that position with a downgrade.

I believe that this downgrade is very telling as the Chinese people have a long tradition of forward thinking and planning. It is my contention that they see the handwriting on the wall and are positioning themselves to reduce the amount of US debt they hold. The downgrade gives the Chinese government cover to drastically reduce purchases of US debt, and buys time for them to figure out how to diversify their existing portfolio of US Debt. If you polled most economists they would say it is not in China’s interest to stop buying debt or allow the debt to go down. I would argue that this is a highly ethnocentric point of view and that the mindset of the Chinese allows them to look forward and weigh what acquiring the debt has accomplished for them versus the short term pain associated with the paper losing value. Additionally, as China develops its own local trading partners and its internal markets grow the US becomes less of a factor in the Chinese economic equation.  If you don’t belive that this is happening let me ask you something. Would you have thought 10 years ago that the Chinese auto industry would out sell Detroit in number of vehicles? Well they did just this past year.

So the message of Dagong Global credit is pretty clear. China is looking to buy less US debt and this rating provides air cover. The implications of this are also clear. As of this writing the US needs to seek out $3.8 Billion Dollars each and every day from the world to fund its deficits of which China has been a major buyer. If China is not buying for their own reasons then others may follow suit making it even more difficult to fund the gap. The inability of the US to sell the debt out to foreigners is setting the stage for the FED to implement what has been dubbed “QE2” or quantitative easing number 2. For those not familiar with QE  it is when the FED prints money out of thin air to buy treasuries to inject money in to the system. The problem appears that the US Government debt demands continue to increase rapidly and a dearth of buyers will force QE on a grand scale. QE is highly inflationary because you are printing money to buy debt, which simultaneously devalues the currency and the debt worthiness, leading to less outside demand for debt and more QE. This is an inflation treadmill that once we get on we can’t get off until it runs its course.  It is  appropriate at this time to quote the Chinese proverb “May you live in interesting times”, to which I say I will take boring any day of the week.

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Thursday, August 12, 2010

MOAB - Mother Of All Bubbles

It appears that there is an unforeseen disaster emerging right under everyone’s nose. This disaster is the next bubble that will pop and devastate millions. The bubble in question is US Government debt. For the past 28 years or so interest rates have traveled mainly in one direction, down. This downward trend in interest rates has been a boon to many. As most of you know, when interest rates fall the value of higher interest rate debt increases. The amount of increase is inversely proportional to the drop in rates. So for over a couple of decades one could have invested in bonds and done very well collecting interest and even making capital gains.

Due to the worsening economy and multiple economic shocks money has run for perceived safety and that means US Dollars and US Government debt. The safety trend is alive and well particularly after the news from last couple of days. Since the 2008 meltdown the general public has shifted funds from equities and equity funds to bond funds at a frenetic pace. The hedge funds of course are not to be left out of any trade and recent reports indicate that as much as 1.8 Trillion dollars in assets have been plowed in to the bond market. It is true that the bond market is huge and very liquid, however, policy decisions and external shocks can have large effects on bond prices.

I look at the current situation in the bond market and see rates at historical lows, a FED that wants to keep them there (at least most of them do) and John Q rushing head long in to the market thinking it is a no lose proposition. For me this sends off warning signals that the bond market as large as it is has become yet another crowded trade, dare I say a bubble of monumental proportions. While the game could be played longer to keep rates down or even push them further down it does appear that the end is neigh. John Maynard Keynes has been famously quoted saying ,“markets can stay irrational far longer than you can stay liquid”. One could argue that the bond market has been irrational for quite a while already given the horrible and worsening US fiscal condition and the Dollar, investors should be receiving much higher rates but instead rates are kept near zero. The FED and other factors have caused interest rates to be pushed lower and lower, just like a compressed spring only a catalyst is needed to cause them to bounce significantly.

As I write this article there are many cross currents that could cause a break in the bond market. Fed President Bullard’s notion of raising rates that he espoused the other day could have unintended consequences if it were used. A round of Quantative easing where the FED begins monetizing the debt in a meaningful way is a sure indication that trouble is around the corner.

A break in the dollar to the downside would be problematic, as well as, the general perception that things are coming apart. I can’t tell you exactly when this will happen or what factor or combination of factors will cause the bond market to unravel, but the odds are very high that it will. The FEDs practice of MOPE or management of perceived expectations has worked very well up to now, but houses built on sand foundations rarely hold up long. Once the government bond bubble bursts, a crowded trade will become a stampede.

Stay out of the way of the stampede there are better places to put your hard earned money. If you are already in the stampede zone you might consider moving to safer ground before the general population does. The millions of players in this market can get spooked on a moment’s notice and small stream of everyday redemptions will swell to that of white water rapids or in a worst case Niagara Falls.

Disclosure: Short US Treasuries - This is not a recommendation to buy or sell only my opinion. Do your own due diligence and consult with a financial advisor before performing any transactions

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Friday, August 6, 2010

Don't Count NLY Out...

So for today’s blog post I want to talk about Annaly Capital Management which trades on the NYSE under Ticker symbol : NLY. I read and article on CNBC that you can read here. The article talks about Annaly (NLY) from the perspecticve of options traders buying huge numbers of PUTS on the stock. The article states that the stock would have to drop 14% from current levels to make those puts profitable. I don’t see this happening and in fact I think that these options will expire worthless and Annaly will recover.

My reasoning for the recovery of NLY is multifaceted. To start with one has to understand Annaly’s business model. What Annaly does in simple terms is it is a REIT that borrows money at a low interest rate from the FED and buys packaged mortgages. Whoa…they are buying mortgages and you think they will be fine are you nuts? I do have confidence they will be fine because here is the deal. Harry homeowner goes to the bank to get a mortgage and is placed in to the Fannie/ Freddie system. These mortgages are all then bundled up and sold out to the government. The government who is not really supposed to be in the home mortgage business turns to the street to bundle up said mortgages and sell them as a package. It gets better, as the government then adds a 100% payment guarantee. This means that even if Harry Homeowner defaults the mortgage still gets paid by the full faith and credit of Uncle Sam. These are the very same mortgage bundles that Annaly buys.

So we have a company, Annaly, that is borrowing at low rates and buying higher paying mortgages that have no possibility of default and distributing the dividends as pass thru to qualify as a REIT, which seems like a no lose proposition to me. Add to this the fact that the recent pullback in the share prices has brought the stock down to book value makes it very attractive. Moreover, the yield on the stock at this time is in the neighborhood of 15% has been rather consistent and beats many investments out there; especially when you consider that much of the risk is absorbed by the US Government, 75% of their book of business. Recently, Annaly has filed to offer 60 million new shares with another 9 million of over allotment and this has caused concerns of dilution. This concern in my opinion is unfounded as the proceeds are going to be used to increase the size of the portfolio of Mortgage backed securities, therefore I believe it will be accretive for Annaly in the near term not dilutive.

So my impression is that the bearish sentiment put to Annaly is unfounded and it has also reached a level in price and valuation which is very attractive. The fact that so many options players are bearish speaks volumes to the downside potential of this stock being limited, instead all the easy money has been made and the risk is to the upside. The biggest risk to Annaly in my opinion would be rising short term rates controlled by the FED, so one has to ask oneself is that is a true risk in the foreseeable future. The other risk is that 25% of their book of business is outside the government guarantee model, but thus far they have managed that very well and I believe they will continue to do so. In this sea of uncertainty Annaly looks more like a life raft than an anchor. Personally I believe that one could buy this stock up to the $18 level and wait out the storm collecting dividends along the way.

This is not a recommendation to purchase or sell Annaly shares, but instead information and perspective for you to do your own due diligence. Disclosure I am long Annaly for the very reasons I have specified in this post.

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Thursday, August 5, 2010

Why Is No One Bothered......

Reading the news this morning I came across a story that just exemplifies the current state of our business and government environment. The article appears in the Washington Post, titled “GM donates $41,000 to lawmakers’ pet projects” and is written by T.W. Farnam. This short piece details how GM suspended its political giving last year when it went in to bankruptcy, but now is beginning to return to the practice. GM is donating again since it has used the advertising smoke screen of claiming to have repaid the TARP (troubled asset relief program) funds 5 years early. I will not bore you dear reader with the intricate details of how GM supposedly paid of the TARP, as there are many articles out there that have thoroughly researched their 8K filing. Let’s just say that the method they used to pay it off was akin to trying to raise the level of water in your swimming pools’ shallow end by taking water in a bucket from the deep end to accomplish the feat. Basically they moved TARP funds around claiming to have paid off the debt while using other TARP funds not actual earnings…well you get the picture…it is not kosher but a great PR campaign. Needless to say dear reader, you and I and every other American tax payer are still the proud owners of GM since the government still holds a 61% equity stake. I find this unbelievable that GM has the lack of moral compass to think that their donations would be considered even remotely acceptable.

It is unimportant who or what GM donates to, but the reality is that it is essentially a taxpayer entity and this sets the precedent for the government donating to itself, on its behalf or to groups that it favors or furthers its agenda. Furthermore, there are many taxpayers, now owners of GM, that may be opposed to where some of these dollars are going. Additionally, these taxpayers find themselves without a say in the matter even though it is technically their taxpayer dollars are supporting GM. Where is the outrage?

We are getting in to murky ethical ground here. If GM were a privately held or publicly traded company not attached in any way to the government teat, then no one has a right to say anything about where they send company money, with the exception of share or stake holders. Until all the connections to the taxpayer and government are severed GM should be using whatever money it makes to actually pay off what it owes the American people and also invest in itself. Congress should step up to the plate and ban any donations of money from TARP entities until they can stand on their own business footing and are truly free and clear of TARP. I can’t fathom why there are no rules about this, but I guess the equation must be political donations good, pay for performance bad, remember the “Pay Czar”.

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Wednesday, August 4, 2010

Piece Of Mind A Few Bucks At A Time...

So I was speaking with an acquaintance after having written my blog post “Plight of the Average American”. I explained that I was inspirited to write that post because I was very surprised at the statistic that nearly 2/3s of all Americans live paycheck to paycheck.  The person I speak of is a well educated professional with a good job making a decent income. His complaint to me was his scant savings. After chatting with this fellow it became apparent to me that while there are many educated people out there with good jobs, a high percentage of them have no money management skills. So I decided to write this blog post which is just a starting point to suggest some concepts to help with money management. As an investment advisor representative I feel it is imperative to help people understand their monetary situation before even thinking about investing.

The first thing to do is to look at your inflows of cash. Inflows are generally pretty easy as most people receive a paycheck and know what the after tax amount is.

The second thing to do is more complicated as you need to document all your outgoing funds. This means that you will need to gather up all the bills you have paid over the last year so you can figure your annual expenditures and see what the average monthly expense is in each category. After you annualize the bills it would also be an opportune time to see where your money is going and make some decisions about that. I think you might be surprised to know how much is spent on what. You should look at these figures and see if there are items that can be eliminated or services that could be shopped around like cable TV or the mortgage. It is important to make certain that inflows are greater than or equal to outflows, if not a different discussion needs to occur.

Making the assumption that you have more money coming in than going out, we can proceed.

The reason for averaging the bills is that while some like your mortgage are static meaning it is the same amount every month, others can fluctuate significantly like your electric bill after having to run the AC for days on end in the summer. If you are careful about setting aside money for your bills each month the average should cover the high bills, since the cash allocated for that item will be less in some months leaving a surplus.

After you have figured out the monthly average and subtracted that from your total inflow, you are left with your disposable income. This is the point at which most people make the biggest mistake, they look at the balance and think to themselves …cool I have plenty of money to spend. The reality is that you should shoot to save at least 5% of your income, but 10% or more would be even better.   Of course if you can’t afford to save these percentages it is still important to save whatever you can not only to build up savings but also to develop the habit.

The second mistake people make is not paying themselves’ first. What this means is, when the check comes in and you have taken out your budgetary items you should automatically remove your predetermined savings before any discretionary spending. Ideally, you should move that amount out of your main account to a savings vehicle of some kind as to avoid temptation and or comingling. It is unfortunate that at the time of the writing of this blog post the FED is punishing savers with incredibly miniscule interest rates well below the rate of true inflation.  Until you have 3 – 6 months of living expenses saved you should not be outrageously concerned with the return on this capital but more with the return of the capital. Your emergency fund should be in something very safe and liquid as you need to be able to count on it being there. After your emergency fund is filled then you can look at other areas to park your money that could generate better returns and the risk factor will not keep you up at night. If you follow these steps you can take giant steps away from living paycheck to paycheck and buy yourself some breathing room. Of course there could be setbacks that are unforeseen such as a home or car repair which could cause you to tap in to savings, but hopefully you will have a cushion to fall back on. Just don’t forget to continue the savings program and you will find life to be less stressful knowing you have some insurance even if you can only set aside a few bucks at a time.

A Crowded Trade...Part 2

The deflationists argue that credit is contracting, the monetary base is under assault and that the amount of debt will lead to a deflationary scenario. The problem is that the deflationist camp overlooks the fact that while private credit and debt have contracted the public side has expanded at a breath taking pace, offsetting the private economy. The figures on Government debt and credit expansion only reflect that which is reported openly, we do not know what is off balance sheet nor FED operations that are shielded from public disclosure.

The stated position of the influential FED Board members is deflation is upon us, which to me translates to inflationary responses. It appears as if the FED and congress stand ready to inflate again, which will keep the merry go round going longer. I believe this to be true as the government is using the media’s nonstop droning about deflation as cover to embark upon Quantitative Easing Part 2, also known as QE2 in financial circles. It has been my experience that if you listen to the media or the FED and invest 180 degrees from what they speak about you will do very well. Not to get off track but for example listening to the recent rhetoric about the sub-prime mortage mess initially one would have believed it was nothing and was contained based upon the pronouncements of FED Chair Bernanke along with those in Congress., and dear reader I am sure you are aware of how that played out.

From a deflationist’s perspective debt can be destroyed faster than money can be printed. First, that may have been true during the period of Von Havenstein in Weimar Germany of the 1920’s, but in this electronic age, zeros can be added to accounts at the speed of light. The central banks are no longer limited to creating physical paper as in inflations of the past. If you don’t think that things can electronically grow faster than debt deflation then look at a live example of the derivatives market, whose notional value appears to multiply exponentially faster than the underlying debt.

The deflation of sovereign debt on a worldwide basis destroys the debt itself and the underlying monetary value to the people or entity that loaned the money, in other words that money goes to “money heaven”. If this were to begin to occur especially on a worldwide basis what do you suppose the confidence in the underlying currencies would be? Moreover, if this were to happen to the US being the reserve currency who would bail us out? To use a metaphor, imagine if you will a large pile of logs has been set up for a bonfire the next day. The logs just sitting there represent debt and they are quite stable and inert. A couple hours before the bonfire an accelerant is dumped all over the logs and everything is still stable. Once a spark is now introduced the accelerant ignites and presto you have a raging fire. The accelerant is inflation and it will consume all the debt in its path. In this case the accelerant acts similar to a capacitor in electronics quietly standing by holding a charge for use later. Just as in the eye of the hurricane the deflationists extrapolate that just because money velocity is currently low or declining that it will continue on that path. As in inflations throughout history, money velocity was stagnant until the catalyst was introduced. I would argue that the sovereign debt crisis would be just such a catalyst, the US States in particular, some of which are in worse shape than Greece and have vastly larger economies.

If there were a Sovereign debt crisis in the US, it would affect the entire world’s debt markets. The US Congress and or the FED would no doubt respond to this situation. The chances are high that the FED would begin to monetize the debt, print money as well as use other tools in their tool box. As this crisis unfolds people begin to lose faith in their respective currencies and begin to spend them rather than hold them because prices are rising, just the opposite of what is being argued right now in the media. In a time such as described the automatic world response is to dump everything and run to the US Dollar and US Treasuries, the people of the world let alone the US would not opt for this option since this would be the epicenter of the situation. The US Dollar is the reserve currency of the world and that has afforded the US many advantages in business and monetary policy. In a scenario outlined being the reserve currency may provide little or no shelter from being dumped in a time of crisis. Today there are economies that use the dollar as their defacto currency and there are large pools of dollars floating around the world in petrodollars, Eurodollars, and other funds waiting just like a capacitor ready to deliver a charge of dollars.

If confidence in the currency is reduced and not necessarily completely lost we would still head in to a world of rising inflation as people use currency for trade, but looked for other means to save, such as: land, gold, whiskey or whatever retains value. This would also mean that interest rates would have to rise and growth would slow. There are many that argue that you can’t have slow growth, high unemployment and inflation, to which I would say look at the 1970’s. Unlike the 70’s I believe we are currently in a period of Biflation where we have simultaneous inflation and deflation, but inflation is going to win out in the end. Last time we had the world running around screaming deflation from the roof tops was in 2008 and yes we had a dip but it did not last as our system has an inflationary bias along with a FED and Government deathly afraid of deflation. This time will be no different.

Tuesday, August 3, 2010

A Crowded Trade....Part 1

If you have ever lived through a hurricane, dear reader, you will understand the concept I am about to introduce. When a hurricane is first predicted there are many warnings and people are advised to seek shelter. For most people at least in the New England states where I reside, this means battening down the hatches and staying inside away from windows and possibly a little praying.  The storm hits and it generally consists of huge winds and driving heavy rains. One can hear the wind howl at frightening levels as the rain whips against the outside of the structure sounding similar to standing below Niagara Falls. The windows shake and rattle and depending on the age and build of your specific structure the wind causes strain that makes it seem as if the edifice is groaning.  Occasionally a branch is heard snapping or some unsecured object crashes about outside as it becomes a projectile. This almost apocalyptic scene goes on for much longer than one would care to live through. Suddenly, one becomes aware that the winds have died and it is eerily quiet outside. If one were to peer or venture out at this time you would notice an unnatural stillness to the sky and landscape. Welcome to the “eye” of the hurricane.  You have made it through one side of the storm system’s swirling winds in to the calm center but dear reader we are only half way complete. The back side of the storm has yet to hit. I know you are asking yourself how this relates to investing. Well I am sure that many of you have heard the news of a coming “double dip” recession in the cards, which is the backside of our current financial hurricane. Right now we are in the “eye” of this financial hurricane and the backside is getting ever closer. I do believe that we unfortunately will experience a dreaded double dip, however, I see it as playing out differently than many of the articles I have been reading which say the same thing.

The preponderance of opinion out there from economists and those who write on the subject ranging from perma-bear Robert Precheter of Elliot Wave, Nouriel Roubini the famous NYU economist, Bill Gross the PIMCO bond king, Paul Krugman of the New York Times and  St. Louis FED Chairman James Bullard is that deflation is the big problem and final outcome. It is going to be deflation so we must act! Everywhere I look this is the refrain that we are in, at, or near deflation and being the contrarian it doesn’t seem right to me. It is no different than everyone in a canoe trying to stand on one side of the boat…well you know what happens then.  My sense is that we are experiencing the asset deflation right now. I can tell you from personal experience that we have inflation in everything you need be it at the super market, insurance, taxes or the doctor's office, although if you could eat you plasma tv which is going down in price one might not agree. I do believe that the seeds are being planted for an inflationary environment that will be difficult to control.

If we look at the players involved in the monetary and fiscal policy of the United States you can deduce the likely policy options and their intended and potentially unintended consequences; to quote the writer Clare Boothe Luce, “no good deed goes unpunished”.   We start with the Congress, which has neither the stomach nor moral compass to do the right thing. Of course doing the right thing at this point is beyond the scope of their collective comprehension, since the problems loom so large that there is no easy painless fix to the nation’s woes, that would make them look like heros with out impacting the masses. The environment at the moment is one of pass the blame, silly statements and charges of discrimination/racism, not exactly an breeding ground for positive solutions.  Politics aside Congress has demonstrated that they cannot reign in their spending. Just recently the congress passed the “Pay Go Act” that meant if congress wanted to spend some amount of money that was not part of the budget they either had to find a new revenue source or make cuts to existing programs to fund the new item. The ink on said act was barely even dry when the congress passed a bill increasing spending without paying for it and continues to do so.  Sure the Congress and President will cut small items like 100 million from budgets, which sounds like a large number but in terms of the US budget is miniscule, at the same time using both on and off budget items they will shell out billions of dollars for various spending initiatives especially if they justify it as “emergency”. Look at the facts, the world has grown more unstable economically and politically by the day so if you think they can’t come up with an emergency rationale to spend even more, then I have some prime swamp land in Arizona for you to buy.

We are in the middle of an election season and many if not all who are up for a vote in November are feeling vulnerable so it would be political suicide for them to not “bring home the bacon”or run on platforms that are unpopular but would be economically intelligent.  This is because the political class sees the government as the primary driver of the whole country, while paying lip service to the private sector. So even as the “TEA party” protests spending, the congress will find a way to do just that, spend. In the mind of the government it is the savior and must spend, tax, and create new regulations since we cannot help ourselves.  Calvin Coolidge once said, “The business of America is Business”, today however it might be apropos the say “the government is the business of America”.  The congress will not be denied until it is just impossible for them to get money to spend, but I believe that is still down the road quite a bit, for reasons that I will take up in another article.

Moving on to the Federal Reserve we have a Chairman in Ben Bernanke, who claims to be a student of the “Great Depression”, but only appears to have studied its symptoms not its causes. It is a kin to a doctor trying to treat a broken bone with aspirin because it will help the pain while never finding out what causes the pain or dealing with setting the bone. Bernake’s solutions while ingenious are not addressing the underlying economic problems only delaying the ultimate outcomes. He believes that money and credit expansion are the only tools to solve the problem.  From his own writings it is learned that he feels the FED did not act fast enough or create enough money/credit to stave off the great depression. He believes that all ills can be cured by monetary expansion as evidenced by his famous speech in which he said that the FED stands ready to deal with the economy and has a tool called a printing press. He further went on to emphasize that the newly created money could even be dropped by helicopter if needed, which is how he gained the nickname “Helicopter Ben”. So the solution for excessive money printing and debt creation is more money printing and debt creation, like detoxing a heroin addict with larger doses of heroin.  Add to this the Board of the Federal Reserve has appointees William Dudley of New York ,Eric Rosengren of Boston, Janet Yellen from San Fransicso, Peter Diamond of MIT, and Sarah Bloom Raskin from Maryland all of whom align with Bernake’s view of monetary policy. Perhaps the last coffin nail is that of James Bullard the St. Lous FED President, who in the past had been a deficit hawk and concerned about inflation ramifications, but is now more concerned with deflation and has hinted at further easing  and no interest rate rises until 2012.     To be continued....