Tuesday, November 22, 2011
GDP , OMG Spain
Let's see - Spain had to pay over 5% to borrow money for THREE months. Admittedly long bills are more expensive at over 6.5%, so Mr. Market is sending Spain to stand in the bailout corner. And who's got the money? EFSF ain't exactly rolling in the cash, now is it? Until the Europeans get serious about funding arrangements for EFSF, i.e., guarantees, it would appear that it is going to have difficulty raising much money. It's time to buckle down and set up a structure that will serve for at least a year. The reason why the Europeans aren't doing this is that "no country" wants to extend the guarantees for fear of experiencing a credit downgrade, and here you might substitute the word "France" for "no country". Germany is already in with major guarantees, and it ain't gonna guarantee no more. Italy can't, Spain can't.
Pressure on the Eastern bloc is rising rapidly. Poland, which in most ways looks pretty good, is having its own problems. Hungary is in there struggling, but paid over 6% for three months. The Czech Republic is okay and relatively stable economically, but is likely to have tougher conditions over the next year.
US - I am pretty sure that the failure of the Super Committee means that the FICA tax cut won't be extended to 2012. It shouldn't be, but that is not going to help the economy much. The automatic cuts due to go into effect as a result of the Super Committee failure don't hit much in 2012, so I wouldn't think it has much other significance, aside from the fact that Fitch is using it as a negative in its ratings scheme.
US GDP 3rd quarter - second revision comes out, 2% is the headline. Gross Private Domestic Investment drops a tad. In current dollars ("real"dollars) GPDI was 1766.8 in Q3 2010 and 1774.6 in Q3 2011, and that explains everything about the extremely low levels of growth we are seeing. Over the last year there has been about 0.004 (decimal) or 0.4% growth in the main economic driver in the US:
What could possibly go wrong in 2012? All the Fed has to do is drop interest rates and a veritable surge of private investment is sure to follow....
Come to think of it, maybe the administration's decision to delay Keystone was equivalent to economic treason? Just a vagrant thought.....
I still think the US is basically in skipping recession territory, but staying there is going to be a challenge and requires a slight uptick in housing next year, the Fed NOT to stage another QE folly, and some dumb good luck. I think we'll get it, but what do I really know? The world is being thrown over Niagara Falls in a barrel, and it seems likely that when the barrel is opened at the bottom we will all have a very different perspective and some of the participants will be quite mangled.
The commodity markets are mostly completely overblown as everyone tries to get out of currencies. More realistic pricing would help global economic growth quite a bit, but there is too much money out there to get there quickly - it seems that we will go to crash mode first.
In Aussieland the Greens (again, former commies) held the Labor government hostage to force through a carbon tax that's going to cost the people billions.
But I'm sure Van Jones let Valerie Jarrett know how much he approved of Obama's delay.
Commodities are still acting stronger than I would expect. Rumor is that central banks are increasing gold reserves, which keeps that price relatively strong in dollar terms. Logically, that's going to funnel the marginal fear money into the less-monetary commodities. But that's just rumor.
I wonder how much of the inflation in low-end necessities is simply because of reduced production capacity in low-end goods? Grains being siphoned off for ethanol means reduced food production capacity, paper mills closing in favor of Chinese suppliers means reduced toilet paper capacity, etc. Or is increased Chinese capacity really taking up the slack (except in food)?
There's still a lot of money out there, although it is vanishing quickly. Money in Europe is probably being destroyed at a massive rate, and until the ECB starts hurling money into the market, the rate of destruction will ensure that commodities (barring real shortages) slowly decline.
This is a nearly total disaster, although most haven't grasped that yet. Within six weeks world markets will be in turmoil.
I can't tell you what exactly will happen in the US. The best case is a skipping recession, with one trough kind of at the end of the first quarter, and one trough at the end of 2012. It seems likely that US taxes net will be increased by about 200-300 billion next year.
Because we do not know what's in the European banks we do not know whether say a German/Czech/Polish axis of stability can form or whether France takes the whole thing right out.
It's a good guess that a lot of governments are going to be confiscating gold soon. It's an even better guess that the US government may have to do it this decade. We do have high gold reserves, but we'll need more.
I suspect that when the dust settles about five years from now, it will turn out that some Chinese banks have about 50% losses on their balance sheets, so I am not looking for any Chinese rescue.
Why? We already have more than anyone else.
Step 1 would be NOT selling gold bullion coins through the Mint.
I can see it now: "They can have my gold when they pry it from my cold, dead, fingers!"
Imagine the interesting new forms of gold jewelry that will appear!
Paper-making is very capital-intensive and labor-efficient, so labor costs aren't really the cause here. I'd be surprised if unfavorable tax treatment of fixed investment weren't at least partly to blame.
In order to make that work, you have to have gold on deposit and earmarked by law for the bonds.
Current US debt held by the public is over 10.3 trillion. Next year at this time it will be near 11.5 trillion. USD borrowing is due to run out quite suddenly in a just a few years.
We will need to float about 2 trillion worth of those suckers. Figure it.
Neil, on paper mills, I suspect a major cause is not labor costs or capital treatment, but water treatment. Paper mills use a goodly amount of water and are usually in the crosshairs of the environmental regulators ... don't see many of those in China, do you?
That doesn't sound like much fun.
We have very high gold reserves, but not remotely enough.
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