John Corzine can't find the money!

So John Corzine, former Chairman and CEO of MF Global, has no idea where the firm's missing money might be found. Interesting people, the likes of John Corzine. These are the people under whose direction all sorts of clever investment vehicles and trading algorithms have been created over the years. We've been assured by these same folks that countless derivatives and trading mechanisms are OK, in fact - good. When challenged, we sometimes get told that we don't have the necessary basics to understand these complex instruments. But of course he has an MBA and is a former Goldman Sachs Chairman and CEO and even former U.S. Senator and State Governor as well. His membership in the Bilderberg Group further establishes his luminary qualifications. Along the way, he and his cohorts have earned hundreds of millions of dollars for the services they have rendered humanity. Anyway, I digress.
My question is this: If a firm like MF Global with all its computer and investment resources and savvy can't find its investors' missing money, wouldn't you have to conclude that either they are crooks and are lying or that they really didn't understand their business so well, after all, and might not even understand basic accounting that well either? Well, there seem to be enough facts on the table already to support the "crooks" part, as the firm is known to have co-mingled its clients' funds with the firm's funds when they "needed" it. Further investigations will likely reveal a lot more illegalities, cover-ups, lying etc. But I suspect my other suspicion has played a role, too. Do these guys really know what they are doing? If they did, they wouldn't be in the pickle they are in right now, I would think.
As a matter of fact, I suspect that John Corzine would have plenty of company if some of his peers in the investment, brokerage, insurance and banking businesses were suddenly cut off from the bailout/stimulus/insider info train of the Federal Reserve. Most of their Ponzi schemes would collapse within a week. Look what happened to Lehman. But it doesn't help if for whatever reason you are no longer part of the club?

Can the U.S. ever really balance its budget?

Every once in a while, I visit the US Debt Clock Site to get a handle on the current U.S. fiscal and general financial situation. An interesting exercise is to see what kind of cuts would be necessary to achieve a balanced budget, that is, to reduce the deficit to zero and thereby to stop adding to the national debt every year. Well, we have to come up with more than $1,300 Billion in cuts. Gee, lots of ways to go about this but one combination is to eliminate defense altogether (scuttle the ships, close all the bases, send the soldiers home without pay or pensions, abrogate all military supply contracts, etc., and pray for peace - this saves $700B), then eliminate all federal pensions (too bad, folks - just sink or swim- this saves another $214B), then also eliminate all income security programs - too bad for all you unemployed folks! - this saves another $407B). That was easy, eh? Well, of course, politically, this is not doable! Furthermore, such cuts would devastate the economy, and with it, tax revenues, so you would need to cut much more than this to compensate. You see where I'm going.
Ok, let's try another angle - we'll just raise income taxes and do some minor expenditure cutting. So, if we doubled everyone's income taxes and eliminated all federal pensions, that might almost also do it, but whoops, since nobody has any money to spend, the economy would tank and therefore incomes and tax revenues would be affected, so we would need to raise taxes far more and/or cut more programs. H'mmm, nothing seems to work here, right?
Did you see the Congressional Super-Committee at work? Boy, did they ever agree on cuts, huh? Well, now you know why. It isn't doable, not politically, anyway. Not likely possible socially, either. Americans would be torching Capitol Hill, the White House, etc. So what do you think the U.S. will do/are doing? There is only one answer, and it is not a real solution but it kicks the can down the road, albeit at an even higher price down that road. The U.S., as well as most other western nations will simply continue to print ever vaster sums of money to make up for fiscal shortfalls. The likes of the Federal Reserve, the European Central Bank (ECB) and the Bank of Japan will just keep buying up more of their governments' IOU's (bonds and bills and other clever securities). This will happen under various guises such as QE1, 2,3,4, . . n, Operation Twist, "liquidity injections", whatever. The middle class will will get poorer and poorer and most will not understand why. The printing will continue until folks recognize that their currencies are being destroyed and enough folks lose their confidence in it, that a wholesale dumping of currency gets underway. Too bad the fiscal redress was not seriously attempted 20 to 30 years ago, when some of the measures needed might, while painful, still have been politically and socially doable given a committed President and Congress. But are the politicians wholly to blame for what has happened? No, I don't think so. After all, did voters elect politicians with "responsible" platforms or those that promised combinations of government programs and tax structures that were way too good to be true? As the old saying goes - It's hard to cheat an honest man".

Why do Nations Borrow ?

As the world gets increasingly mired in debt, Every day I listen to economists, talking heads as well as regular folks using terms such as "excessive debt", "manageable debt", "excellent (or poor) debt to GDP ratio", "low deficit", manageable deficit", etc. Debt and deficits may or may not be manageable but it is a slippery slope at best. Shakespeare had it right in Hamlet: "Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry." When individuals enter into significant debt, it is usually to borrow money for a major purchase, such as a home with the idea of repaying this debt over one's working life. Many people, maybe most, especially in the past, have done exactly that. In addition, they have usually saved some money along the way and managed to leave something for their children. Individuals normally don't have chronic deficits because this would mean that such an individual was adding to his outstanding debt every year, rather than paying off the debt. This wouldn't make sense and would lead to bankruptcy. So, do individuals need to borrow in the first place? Well, maybe not, but if the idea is to acquire something like a home early on in one's career, or to start a business, this can make sense, provided that the repayment terms are not too onerous relative to one's earnings and spending habits and of course, that the loan is repaid.

But why would nations ever need to borrow, especially chronically (i.e. run deficits)? Since a nation is a very large collection of individuals, it would seem that whatever expenditures governments contemplate should be paid for by passing the hat around, usually in the form of taxes and duties. If you need to spend more, tax more. Why would any nation ever want to borrow money so future taxpayers would be on the hook? And why would you borrow chronically? Will it be easier to pay those taxes tomorrow than today? Do nations around the world expect some big infusion of money down the road from the equivalent of rich old aunt Millie passing away? Let's face it. Short of possibly having to repel an invading force where the very existence of a nation is at stake, sovereign borrowing just does not make any sense. What's worse, future interest payments will only serve to reduce the outlays available to provide citizens with government services. No, in fact, nations should purposefully run small surpluses for that rainy day to defray the unusually high costs of repelling aggressors or to deal with natural or man-made disasters.

Well, in fact, I think most of us know why nations borrow. It is human nature combined with politics. Politicians love to bribe the citizenry with their own or future taxpayers' money. And citizens? For the most part, they love to bribed. They vote for a better today, for their pet projects, etc. Tomorrow's pain is something that can be set aside for . . . tomorrow.  Unfortunately, history demonstrates that with time, borrowing costs mount and lenders become scarce, leading to debt crises. Then central banks are urged to print some of the shortfalls. This process is often disguised to reduce the rate at which confidence is eroding. We engage in stimulus, quantitative easing, blah, blah, blah. Eventually, as confidence erodes even more, increasingly massive printing becomes the only short-term measure available to avoid banking and institutional failures and finally city, state and sovereign failures. Unfortunately, history also shows that such a remedy eventually destroys that nation's currency in addition to that nation ultimately succumbing economically. If a minor currency is destroyed in this way, that country's transactions and trade can be substituted in some other currency, such as the $US. However, should that currency be the world's principal reserve currency . . .

U.S. Debt Farce

It's sad to watch the U.S. debt talks. The wrangling is bad enough but the really sad part, in my view,  is that virtually nobody in the halls of power is ready to propose actually balancing the budget right now! Not tomorrow, the next year, in the next 10 years - but right now. America and most other nation seem incapable of doing what every parent or credit counselor would tell his 21-year old who was spending way beyond his means - cut up the credit cards, cut back on the spending and work harder to pay off the debts you should not have acquired in the first place. Americans have been living beyond their means for decades now. After all, that's what running a deficit is. Every deficit adds to the existing debt or national mortgage. What a concept! A growing mortgage! It's entirely nonsensical but nations the world over have bought into this as a new normal, a kind of global financial insanity whereby even known economists with many degrees and awards spout such gibberish as "manageable deficits". State/provincial governments as well as municipalities have also fallen victim to the disease. No, the talks on raising the debt limit in the U.S. are really pretty well a side-show. It's just arguing about how far to kick the can down the road before doing it all over again. In any event, in the case of the U.S., it should be renamed the "Printing Limit" because no one is willing or able to lend the U.S. that kind of money any more. As has increasingly been the case in the last few years, the Federal Reserve simply prints up what the Treasury needs and couldn't borrow through new bond issues. Sad, very, very sad to see how a once proud and independent country is becoming a deadbeat.

Moody & other ratings agencies under fire for downgrading Portugal

The European Commission has come down hard on international credit ratings agencies following the downgrade of Portugal by Moody's. It seems that ratings agencies are finally getting a bit more truthful, suggesting that some governments can't repay their obligations (are deadbeats). Can't have that now, can we? However, I wouldn't put it past this bunch to be in cahoots with the U.S. or more specifically, Wall Street, as European Commission spokesman Amadeu Altafaj seemed to hint. Great way for a solid pop in the $U.S. and lots of money made for those in the know. Anyway, a good argument can be made that this was at least partly manipulation. Now it's time for Moody's and others to level the playing field and speak the truth about the biggest deadbeat of them all - the U.S.

Fear in Europe over Greece Default

Europe is fretting over Greece. While the future of the EU and the Euro may indeed be at risk, the bigger concern probably actually relates to the exposure of French and German banks and their governments to a possible Greek default. The citizens of Europe might be even less likely to support what is actually a French/German banking bailout than a Greek bailout if this aspect is highlighted. Take a look at the chart below.

If Greece defaults, then a banking bailout would be almost a certainty. Otherwise, a domino effect would probably take down the world's whole banking system. So the choices are: 1) Bailout Greece (again and again) or 2) Let Greece default and bail out the banks instead. Neither seems to be an attractive option when considering the likely backlash from voters.

Greece: the next Lehman - update

In a previous post, I talked about Greece having the potential of becoming the next Lehman. Well, yesterday, the New York Times chimed in with a similar theme. I believe the problem of Greece is still under-appreciated in North America. Just as Lehman had global consequences, so might Greece!

Financial Repression

It's not new but Financial Repression is a term seen recently in many articles, even in the mainstream media. It refers to a purposeful and methodical policy approach by government towards solving its deficit/debt problems by massively cheating investors and savers rather than contemplating default. This is accomplished through strong government control and intervention of interest rates and financial institutions. Savers are given close to zero interest in spite of considerable inflation, which is usually purposefully under-reported.

Because the problems are far more severe than in the past and because world markets far more fluid today, I doubt that governments will be able to control markets successfully enough this time around to prevent a bond collapse (higher interest rates) or some other financial crisis. Many have already begun to flock to gold and silver in an attempt to escape controlled markets. However, so far, the U.S. has succeeded in maintaining absurdly low yields on its bills and bonds, perhaps giving more support to some cynics' views that these are certificates of guaranteed confiscation. For a thorough treatment of "financial repression", please see this excellent article by Daniel R. Amerman.

QE3 Gets Closer as U.S. Economic Indicators Falter

As economic storm clouds gather (see CNBC for example), pressure mounts on the Federal Reserve to launch QE3. They will deny and obfuscate as long as possible but at a certain point they will mount their white stallions again and sally forth to the "rescue". Trillions more will be printed and trillions more in debt accumulated. Currencies, stock/bond markets and commodities will gyrate. Gold and silver will make new highs while U.S. credit ratings will be downgraded. But I'm getting ahead of myself a bit. The economic situation and especially the stock markets will first need to suffer a bit, enough to be noticed by the general public, maybe even some panic drops in market values, for example. Political and public consensus will then build around the new imperative of QE3 although it may be called something else to avoid the obvious embarrassment of creating a string of failed initiatives.

Is Greece the next Lehman?

Is Greece the next Lehman? Well, there are many who are suggesting a comparison, including me, but I'll just point to some published thoughts.

Federal Debt Ceiling and QE3

There is much talk about raising (or not) the U.S. debt ceiling and ending Quantitative Easing Round 2 (QE2). Honestly, I see all this as clumsy posturing. Americans and their leaders do not have the stomachs for living within their means, at least not yet. Obama and Congress are fooling around with $30B cuts, when the deficit is more like $1,400B. The world is awash with U.S. Treasury debt. The Chinese and others are pretty well saturated now. The Federal Reserve will have to continue printing to buy up most of the new bonds and bills issued by the Treasury. Raising the debt ceiling is also a priority for Wall Street - take a look at this. So QE3, in my opinion, is guaranteed. The U.S. will kick the can down the road yet again rather than face a default now.

Commodities at new highs!

Once again, commodities are at new highs. Some are at new highs, some are close to new highs and the precious metals are currently in the lead. Why is this? Has the reckless printing of money around the world anything to do with it? Or are speculators simultaneously attacking oil, coffee, copper, gold, silver, corn and soybeans? If printing your way to prosperity is the answer, then why doesn't the fed just send every citizen a cheque for $1,000,000. Of course, gasoline prices might just go to $50 a gallon and a 1/2 pint of strawberries might also then cost $35. H'mmm

Thoughts on "In Fed We Trust" by David Wessel

I just finished reading "In Fed We Trust" by David Wessel. The author details the drama within the Federal Reserve, the Treasury and other financial and regulatory organs leading up to and through the financial crisis of 2008-2010. Many behind the scenes revelations provide an insight into Ben Bernanke, his changing views and ultimate mantra of "Whatever it takes".
The problem with "whatever it takes" is that the collateral damage has likely been greater than the crisis that was being avoided. In fact, I would argue that at best we have merely kicked the can down the road. None of the underlying problems of debt, derivatives, pyramids, excessive speculation, financial wizardry and gimmickry have been addressed. There has been no return of focus on true economic output, balancing city, state and federal budgets and living within one's means. The recent Obama budget is based on rosy revenue forecasts, sheer make-believe. The Federal Reserve now holds more government Treasury securities than China and is set to print trillions more, since the world is awash with dollar-denominated debt and the Treasury must borrow or have budget shortfalls covered increasingly by printed dollars. So whatever it takes - wherever will it take us?

Failure of Keynesianism

Those who have studied the history of the Great Depression typically split into two groups. Those who think government tinkering (easy money) helped to create the bubble and further tinkering made it deeper and last longer versus those who posit that the problem was insufficient tinkering, stimulus, etc. Ben Bernanke seems to believe that a lot more Keynes is needed. Too bad that Keynes's followers seem incapable of such ardour during the so-called good times when governments and society is supposed to run surpluses in preparation for the bad times.
Anyway, we are continuing to run deficits and stimulate and print like crazy and I think this time round we will finally understand that Keynesian approaches don't solve any real problems of financial over-indulgence, impropriety, manipulation and outright fraud. In the end, only hard work, reduced expectations, lower consumption consistent with individual and national revenues and production are the key - reality, in other words, not smoke and mirrors. We are watching this grand experiment around the world, not just here in Canada and the U.S. And I thought I wasn't really into spectator sports!

The Economy according to the Baltic Exchange Dry Index (BDI)

Since I touched upon the topic in October, 2010, of the apparent disconnect between Commodity prices (rising) and the Baltic Exchange Dry Index (falling), the two indexes have continued to diverge. The BDI, as stated before, is normally a good proxy for world trade conditions, since it reflects world shipping demand and price whereas commodity prices normally also correlate well with a strong world economy. My earlier contention was that rising commodity prices were largely reflecting world currency debasement (printing). Since October, 2010, I see nothing to suggest otherwise. The BDI, on the other hand may be influenced by too many ships coming on line, spurred by the previous boom, so it may be a lower than economic conditions alone would dictate.