Weekly Wanderings 2 September 2009

Each week in these meanderings we not only bring you timely economic discussion, we also draw to your attention some of our favourite sources of economic news and commentary.

This week we kick off with Dr Chris Martenson, whom we reference elsewhere on our site. Chris runs a subscription site, but occasionally releases reports for public consumption. The following piece is so well constructed and clearly written, that we highly recommend you read it in its entirety.  But if you don’t feel like wading through it, please just check out the executive summary and key points we’ve stripped out and included below:

 

The Martenson Report: Monday, August 31, 2009

Executive Summary

·       A funding crisis is in store for the US government and citizens.

·       The “Fourth Horseman,” represented by the dollar going down while interest rates go up, will signal the start of the funding crisis.

·       The Federal Reserve Custody Account has been growing faster than the Trade Deficit, a historical oddity.

·       The custody account represents a grotesque imbalance with risks of its own.

·       The US will eventually face a funding crisis. For now, that crisis has been forestalled by willing foreign central banks.

·       This end begins with the widespread recognition that the US is insolvent and that propping it up is a lost cause.

·       It all ends with a vastly lowered standard of living…

Currently the US is running a fiscal deficit that is officially pegged at $1.58 trillion.  This, however, is a misleading number, as the real deficits accrued by the government are far higher…

In the real world, inhabited by real people, reflecting real spending, the actual 2009 deficit would be much closer to $6 trillion (maybe even $7 trillion?) than $1.58 trillion.

For the record, $6 trillion is more than 40% of GDP, an amount that should cause everyone to immediately reflect on what the future could bring…

The real question here is, “Who is providing the funds for all this deficit spending?”  As Sprott Asset Management laid out in a tidy report in June of 2009

(Sprott Asset Management is another very good source of reasoned and accurate commentary)

“…., in order to consume the vast quantities of new Treasury debt being offered, the usual purchasers of Treasury debt would have each needed to buy three times as much Treasury debt this year as they did last year.  A 300% increase by each.”…

Where We Are
The situation, as I see it, is quite simply this:  Without heavy foreign propping of recent US Treasury auctions, they would have failed.  There is simply not enough domestic savings to have bought the entire $1.5 trillion in Treasury sales in the past year.  So that money had to come from somewhere, and that source was foreign central banks, which bought Treasuries at a pace faster than can possibly be explained by trade imbalances.

However, we got into this crisis because of vast imbalances.  And instead of using the crisis as an opportunity to reduce those imbalances, central banks have collectively opted to simply transfer the imbalances over onto their own side of the table.

These imbalances will have to be unwound at some point, and it is that which causes concern.  Nature tends to release pent up energy, or imbalances, in a sudden, if not startling, fashion. The bolt of lightning suddenly strikes from the sky, abruptly settling an electrical imbalance. The ice dam breaks in rush when the pressure gets too high.

For now everyone seems more or less content to continue having foreign central banks prop up US government deficit expenditures.  But this is an imbalance and pressure is building.  Either a true economic recovery arrives in time to release this pressure, or it will resolve in some other, possibly startling, way…

At the federal level, the US is completely insolvent…

I believe that there is a non-zero risk that what has worked in the past will not work this time.  It is not at all clear to me that applying vast amounts of thin-air money can overcome two things:

1.    the vast amounts of debt created over the past 20 years far in excess of true productive capacity

2.    the physical reality of dwindling primary sources of wealth – energy, soil, water, minerals, and the like

 

Our second commentator this week is Max Keiser, to be found at MaxKeiser.com. Max has a wicked, perhaps somewhat over the top, sense of humour. He is very experienced in financial matters, having worked as a Wall Street banker for over 20 years. Each week, he and his co-commentator, Stacy Herbert, review the week’s financial shenanigans on a TV broadcast called “On the Edge”, and usually also interview a well-known commentator or blogger. This week his guest was Mike “Mish” Shedlock, perhaps the best known of the bloggers on financial matters. Take a look at Max and listen to Mish in the videos below, as they discuss bailouts, inflation vs deflation, and the lunacy of “Cash for Clunkers”.

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