Okay, we made up the word. But in medicine, as any physician knows, a blastoma is a malignancy of so-called precursor cells called blasts.  Should such an anomaly go untreated…well, let’s not go there.  Anyway, we decided to refer to any chronic economic conditions that threaten the health of our economy as econoblatomas, because of the real risk that they are precursors to a potential economic crisis; that is, they can spread.   What follows are what we call the Seven (there are, of course, others) Warning Signs of Econoblastoma.

1. The Euro – A default by any other name:

Greece will default on its debt, probably within the next 60 days.  They’re working on a plan that will allow the EU leaders to call it something else, but whenever lenders get taken to the cleaners by a borrower there has generally been a default.  Greece’s lenders (bond holders) are soon to be taken to the cleaners (again) so we’re about to see the first default in a Euro Zone country.  Now this Econoblastoma has been under treatment for a long time with, we’re sorry to say, poor results.  The prognosis is dire.

The reader will recall that over a year ago, the private bondholders who loaned money to Greece (based on fabricated economic assurances by the Greek government) were informed they would have to take a 20% haircut in order for Greece to meet its obligations.  Then last July the bondholders were told that 20% just wouldn’t do it, and that a 50% haircut would be required.  Now the bondholders are being told,  “fifty percent?” well, “that was okay for starters,” but it’s not nearly enough to treat this particular Econoblastoma.

No, it seems the cure for years of Greek profligacy will require that the holders of about  $206 billion in Greek bonds will have to swap them for bonds that will pay, upon maturity, 60% less.

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The fact that Paul Krugman received the Nobel Prize in economics makes sense given that both Al Gore and Obama received the Nobel Peace Prize. But that is the only way that it makes sense.

In his December 29^th column in the New York Times, Keynes Was Right, he continues to make the case that the only reason we haven’t come roaring out of the Great Recession is because we spent too little.

Krugman cites the downturn of 1937 when FDR’s government programs were curtailed and unemployment rose. He says that unlike in that fateful year we should instead redouble our efforts and spend more to prime the economic pump. Austerity is insanity he says. We must spend more as Keynes would have advised, deficits (and inflation) be damned.

Build pyramids as Keynes said we should. So what if the they do not contribute, and probably detract, from the quality of the economy. It is the quantity of economic activity that we are interested in not quality. Get people employed doing whatever. This is the road to prosperity!

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On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Francis Cianfrocca to discuss how MF Global went bankrupt, why the CPI is an inaccurate reflection of life for an average American, and what the real financial situation is for many families today.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

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Ex-MF Global CEO Jon Corzine denies allegations
Why MF Global Really Went Bankrupt
Inflation holds steady in November
Accelerating Health Care Costs Wiping Out Much of Americans’ Income Gains
Japan mulls relaxing beef import restrictions

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With the 2008 “Credit Crisis” bursting the global housing bubble; the United States led and the world followed with the massive amounts of government spending and money-printing stimulus promoted by “Keynesian” economists. To stem the crashes in prices on stock and commodity exchanges and a run on European banks, the U.S. Federal Reserve enlisted the world’s central banks in a coordinated drenching of the earth in vast amounts of freshly printed cash.

But as the crisis waned and the “Great Recession” began, governments and their central banks continued to pour wave after wave of Keynesian deficit spending and money printing. With economic activity about to slow and austerity shrinking excess government spending, the citizens of the world are about to be rewarded for their trust in government with a steep recession coupled with high levels of inflation. Economists refer to this witch’s brew of escalating misery as stagflation.

The U.S. Federal Reserve, European Central Bank, Bank of Japan, and other central banks around the world expanded money supplies by purchasing $2.5 trillion of sovereign debt and distressed banking assets to stem the risk of a deflationary spiral; from this, resultant lower wages and higher unemployment led to a self-reinforcing decline in global consumption. (more…)

Team Obama is out and about mourning a “double-dip recession,” while Fed head Ben Bernanke is warning of a faltering economy. I have described the current economic environment as the front end of a recession.

But Obama’s populist, class-warfare attack on millionaires and billionaires, his new war on bank profits, his linking arms with the protesters occupying Wall Street, and his big-government stimulus plan will surely not solve this crisis.

The September jobs report underscores the economic alarm. The unemployment rate stayed at 9.1 percent. But the rate of marginally unemployed (U6) jumped from 16.2 percent to 16.5 percent. Nonfarm payrolls rose by 103,000 while private payrolls gained by 137,000, small-enough increases to dodge a recession bullet right now. But nearly half those job gains came from the return of 45,000 striking Verizon workers.

And while the small-business household survey showed an encouraging jump of 398,000, it turns out that an even larger 444,000 are only working part-time. So household employment — excluding the part timers — actually fell by 46,000. That’s a discouraging sign. At the same time, worker earnings are rising less than the inflation rate. That’s a consumer drag on the economy.

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From the Associated Press:

The Federal Reserve is running out of options to try to boost a slumping economy and lower unemployment. So policymakers are expected to reach 50 years back into their playbook for their next move.

Most economists expect the Fed to announce a plan Wednesday to shift money in its $1.7 trillion portfolio out of short-term securities and into longer-term holdings.

The plan could lower Treasury yields further. Ultimately, it could reduce rates on mortgages and other consumer and business loans, too.

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From the Associated Press:

Consumers paid more for a range of goods and services last month, and unemployment benefit applications jumped last week to the highest level in three months. The latest data offered a picture of an economy facing inflationary pressures and a depressed job market.

The Consumer Price Index rose 0.4 percent in August, the Labor Department said Thursday. That followed a 0.5 percent increase in July. Excluding volatile food and energy costs, core prices increased 0.2 percent.

Prices for food, energy apartment rents, and clothing all increased.

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Amidst the financial flight-wave to safety, with stocks plunging, gold soaring, and Treasury bond rates collapsing — and all the European banking fears which go with that — there’s an important sub-theme developing: An almost-forgotten monetary indicator, M2, which is mostly cash, demand-deposit checking accounts, savings deposits, and retail money-market funds, has been soaring.

According to the St. Louis Fed, M2 is up 24.2 percent at an annual rate over the past two months. Almost out of the blue, that comes to a near $500 billion increase. In rough terms, the M2 explosion breaks down to $165 billion in demand deposits and $335 billion in savings deposits.

What’s going on here? There’s a flight to government-guaranteed accounts. Some people believe Europeans are withdrawing from their own banking system and parking their money in the U.S. banking system, guaranteed by Uncle Sam. Kelly Evans reports in her Wall Street Journal column of a $30 billion outflow from equity mutual funds that has probably gone into cash.

This is a very disconcerting development. Normally, big M2 growth would signal a faster economy, and maybe even higher inflation. But as economist Michael Darda points out, the velocity, or turnover, of money seems to be plunging.

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On today’s edition of Coffee and Markets, Francis Cianfrocca and Ben Domenech talk about Rick Perry’s comments on the Fed, and Florida’s Adam Hasner talks about his run for the Senate.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

Perry Doubles Down on Fed: Open Up and Be Transparent
GOP Field Launches Sharp Attacks on the Fed
Florida Senate Race Heats Up Early
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Gov. Rick Perry scorched the political pot on Tuesday with a red-hot rhetorical attack on Fed-head Ben Bernanke. When asked about the Fed reopening the monetary spigots, Perry said, “If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we — we would treat him pretty ugly down in Texas.”

And that wasn’t all. In a more controversial slam, Perry said, “Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous — in my opinion.” (Italics mine.)

Pretty rough stuff. Very aggressive language. And undoubtedly way too strong. It was poorly received in the financial world.

No, Ben Bernanke is not a traitor. This is a policy dispute; it’s not a matter of patriotism. However, and this is an important however, the rest of Perry’s statement suggests that his analysis of Fed policy is right on target. In other words, wrong words, right analysis.

The Texas governor, who by some polls is the new Republican presidential frontrunner, went on to say, “We’ve already tried this. All it’s going to be doing is devaluing the dollar in your pocket. And we cannot afford that.”

Well, to me that is exactly right.

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Ben Bernanke’s shocking FOMC announcement on Tuesday — that its zero-interest-rate target would be extended for two more years through the middle of 2013 — drove Dow stocks up over 400 points. But this new policy had no stock market carry-over on Wednesday, when the Dow plunged over 500 points.

But we have not heard the last from Ben Bernanke — not by a long shot.

Buried in the last paragraph of this week’s surprise FOMC announcement was this huge statement: “The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.”

This is a brand-new statement. And in all likelihood it was purposefully open-ended. A Fed source suggests that this sort of stuff is usually left out of sight and buried in Fed committee minutes, released well after the FOMC meeting, and not put boldly in the actual policy statement. So clearly, it’s very important.

What might it mean?

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My favorite contributor over at Black Entertainment Television wrote a piece on President Obama’s eroding support among African Americans –specifically on his dismal handling of the economy. According to a Washington Post/ABC News poll, Obama’s African American support has dropped from 77%, to just over half supporting his stewardship of the economy. What a difference just two and a half years can make! When the president was elected, the exuberance among African Americans was infectious, joyous, and a bit overly optimistic as this clip from the day after the election shows:

Liberals and African Americans still clinging to “hope and change” cite in the president’s defense that he inherited a terrible economy from President Bush and that Obama can’t be expected to turn the economy around in only two and half years. It’s almost a plausible argument – until you start comparing this presidency and economy with the economy our 40^th President inherited from Jimmy Carter in 1981.

When Ronald Reagan was inaugurated in 1981, interest rates were at 21%, inflation was at a wrenching 13.5%, and unemployment was at 7%. In contrast, when President Obama was inaugurated in 2009, interest rates were at a historically low 3.25%, inflation stood at 4.2%, and unemployment was at 7.8%. The misery index (the addition of inflation and unemployment numbers) when Reagan entered office was 20.5%, for Mr. Obama, 12.8%. Currently under President Obama, inflation is 2.7% and unemployment is at 9.2% and climbing with many economists believing it’s really 16% giving Obama a real misery index of 18.7%. Even the liberal Washington Post suggests that President Obama has had enough time to jump start the economy:

The economy rebounded significantly during Reagan’s third and fourth years in office. The unemployment rate declined, although not spectacularly. It was still at 8.3 percent in December 1983 and at 7.5 percent in August 1984 as the general election campaign was entering its final months.

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Republicans in Congress are hewing to the best traditions of the founders of the nation, and the founders of their own party, in their effort to keep a lid on federal borrowing. The idea that there is some constitutional bar to their refusal to raise the debt limit betrays Democratic desperation.

The Constitution was established so that a stronger Union would be able to pay its debts. The Confederation government had already defaulted on its Revolutionary War obligations. Thus the new government assured its creditors in the new Constitution, which provided that “All debts contracted and engagements entered into, before the adoption of this Constitution, shall be valid against the United States under this Constitution, as under the Confederation.” The Federalists and their successors paid off the entire national debt by the 1830s.

After the Civil War, the American people settled permanently the possibility of repudiating the national debt. Section four of the Fourteenth Amendment simply says, “The validity of the public debt of the United States, authorized by law… shall not be questioned.” Thus the Republicans foreclosed the possibility that, should the Democratic party return to power, it would repudiate the war debt—or pay the Confederate debt.

While other provisions of the Fourteenth Amendment provoked intense debate, section four did not. “I need say nothing of the fourth section,” said Representative Thaddeus Stevens, “for none dare object to it who is not himself a rebel.”

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When Ronald Reagan ran for President in 1980, it was said of him that he was not the “sharpest knife in the drawer.” The old joke went that in his role in the 1951 role in Bedtime for Bonzo, the chimp that played Bonzo was smarter than the presidential hopeful.

It’s true that President Reagan, for all his charm, may not have been a rocket scientist. However, what he did have – and what many politicians today lack – were defined morals, principles, and ethics. More importantly, he relied on those assets to guide him through many troubling times as President.

In 1981 when Reagan took office this country was in dire straits economically. Stagflation that resulted from Jimmy Carter’s pursuit of altruistic ideals had led to high unemployment, an energy crisis that culminated in gas lines, and awful prospects for future economic growth. Sound familiar?

Among Reagan’s actions as President that re-energized this country economically were tax cuts, deregulation, and interest rate hikes to kill inflation. All things considered, these policies worked phenomenally well, and the US entered a 20-year period of growth led by a manufacturing resurgence.

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With a flamboyant downgrade of the outlook for economic growth, jobs, and profits, Wednesday’s 280 point Dow plunge to launch the so-called June stock swoon is a warning shot across the bow.

The Dow tanked alongside a batch of dismal economic data. The ISM manufacturing index, ADP employment, Case-Shiller home prices, and consumer confidence are all pointing to 2 percent growth or less, rather than the kind of 5 percent growth we ought to be getting coming out of a deep recession.

The economy now looks like a Government Motors engine that’s stalling out. Or perhaps, with energy and food inflation, and housing deflation at the same time, the economy is acting like a pinball machine on permanent tilt.

There’s a key message here: Big-government stimulus never works.

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On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Francis Cianfrocca to discuss jobless claims, the Fed’s realization that American’s buy groceries and gas, and whether or not we’re ready to pay higher taxes to erase the debt.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

Weekly Claims See Fall, But Jobs Picture Remains Weak
Existing Home Sales Unexpectedly Dip in April
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Sen. Toomey On Debt Limit: ‘No Danger Of A Shortage Of Cash’
GOP “No New Taxes” Position Is Rapidly Crumbling

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On today’s edition of Coffee and Markets, Brad Jackson is joined by Pejman Yousefzadeh and Elizabeth Blackney to discuss how the Fed’s monetary policy has created a two tier economy and the impact that has had on the jobs market and the average American family.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

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Pej: My Kingdom For a Coherent Monetary Policy (Paul Ryan Edition)
Pej: Let Me See If I Have This Straight
Coffee & Markets: Investors and Economists Slap Bernanke Over QE2
Coffee & Markets: David Malpass on the Government as a “Silent Partner”

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The recent correction in the commodities markets may be providing Bernake, Geithner and their easy money acolytes with a sense of relief given the relentless run up in prices of raw materials since the announcement of QE back in 2008, but they should not sleep tight just yet.  As anyone in the markets will tell you, when any underlying commodity has a price move so vertical in its trajectory it’s bound to face a correction as the smart money, having gotten in for fundamental reasons much earlier along the trend line now wait for the panic buyers or the Johnny-come-lately’s to give the rally that last unsustainable spike to unload their longs and leave the suckers holding $40.00 silver in their purses.

So one must step back and take a long view.  Although it would appear that those of us who warn that inflation is not just a threat but very much a fact of life now were knee-jerk pontificators jumping on the commodities rally trend for political (read: Fed/Obama bashing) reasons, the analysis is quite sound.  Most important, it is methodical not emotional as price surges tend to make investors and analysts from time to time.

Here are some facts: even with the inevitable correction in commodities, as of this writing crude oil is 35% more expensive than it was a year ago…advancing with ups and downs along the way from as low as $17.50/bbl in November of 2001 to its current level of over $100/bbl or around a 19% annual appreciation in a decade since the Fed started giving away dollars.  In that same year silver is still up 93%   Wheat 84%. Cotton 100%  Coffee 55%. Cattle 10%, etc.  In that same decade the USD index against all currencies shed 40% of its value.  Gold is up 22% for the year.  More revealing, the most precious metal and most stable of exchange mechanisms is up an astonishing 450% since 2001. Put another way, whereas the dollar was worth 1/250^th of an ounce of gold in 2001, it is now only worth 1/1500^th.  Money can be printed with much more ease and speed than gold can be mined.

To understand why the Bernake’s and Geithner’s of the world view CPI through rose-tinted glasses we must remember who they are.  They are wonks who have spent their entire careers lecturing and/or fidgeting with economies without actively participating in them.  They are awash in data and are hardwired to extrapolate patterns from the past to predict the future.  But we have only had a non-gold fiat monetary system in place since 1971 which is hardly enough time to get a handle on repeating macro-economic cycles in such an ever changing and dynamic landscape.  And I want to offer something else.  From the late 1940s to the mid-1980s the United States was the dominant manufacturer in the world.  The reason?  Of our three main foreign competitors today, China, Japan and Germany, one was mired for much of the third quarter of the 20^th Century in a disastrous experiment with Maoist communism while the latter two’s urban centers had been reduced to utter wasteland as their reward for launching the most devastating war in human history.  Indeed, all of Europe was digging out of the wreckage of their mass-fratricide, including a bankrupted Great Britain…once the supreme power of the world.

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It was sad to watch Federal Reserve Chairman Ben Bernanke being forced to hold a political press conference for the first time in the Fed’s 102 year history. Bernanke nervously defended the merit of the Fed subsidizing $3 trillion in Congressional deficit spending and $2 trillion in Wall Street bail-outs; but he looked tired and defeated. He should have just apologized that the Fed’s policies had the unintended consequences of exporting American jobs, igniting world-wide inflation, impoverishing seniors and now threatening the destruction of the AAA credit rating of the United States. Perhaps then he could he could have honestly asked Americans: “Please allow Congress to raise the debt ceiling, so we can continue to spend money.”

Bernanke was a Princeton academic before serving as a Governor of Fed from 2002 to 2005, where he gained notoriety for developing the “Bernanke Doctrine”. The professor theorized the world had entered a period of “Great Moderation” where brilliant economists, like himself, could reduce fluctuations such as industrial production, unemployment, and GDP by “1) improved government economic stabilization policy, 2) financial innovation and global integration, 3) improved inventory control and supply chain management, and 4) and economic good luck.”

After the “9-11” terrorist attack in New York, Ben Bernanke gave a speech that reassured bankers and hedge funds the Fed could manage any shock to the economy titled: “Deflation: Making Sure “It” Doesn’t Happen Here.” The professor stated the Fed “has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief”. He stated that “recession, rising unemployment, and financial stress” could be countered by:

1) increase the money supply through the “printing press”;
2) “print money and distribute it willy-nilly”;
3) lower interest rates – all the way down to 0 per cent to “be able to generate inflation”;
4) control corporate bond yields by lending to banks at 0% and accepting bonds as collateral;
5) “devaluation and the rapid increase in money supply”
6) buy foreign currencies on a massive scale to depreciate the dollar;
7) finance the Treasury’s purchase of U.S. companies with “newly created money”.

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Fed head Ben Bernanke, at his first-ever news conference on Wednesday, slammed the door shut on any new QE3 pump-priming. The $600 billion QE2 program to purchase bonds will end on target at the end of June, and that will be that. Mr. Bernanke also suggested that the Fed’s “extended period” for the near-zero federal funds target rate could end in a couple of meetings. Perhaps these announcements suggest a bit-less-easy monetary policy. Perhaps.

But Mr. Bernanke had no defense of the sinking dollar, or the inflation it brings, or the drop in middle-class living standards it causes. So it’s little surprise that gold prices surged $24 to $1,526 during the Fed chairman’s press conference. Silver jumped sharply as well. The markets clearly don’t see any King Dollar shift by the Fed.

Mr. Bernanke just doesn’t get that inflation-sensitive market-price indicators — like rising gold, oil, and commodity indexes, and the falling dollar exchange rate — are trying to signal higher future inflation. Instead of listening to markets, he is determined to fight them. This is a losing battle. Instead of a market-price rule (anchored by gold) we have some sort of Bernanke fine-tuning rule. It’s not working.

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