Austerity, Hoover, Wars & The Great Depression

February 25, 2011 · Posted in General Economics · Comment

My 2 cents about the following statement from a NYT article:

But no matter how morally satisfying austerity may be, it’s the wrong answer. Hoover’s austere instincts worsened the Depression. Roosevelt’s postelection reversal helped, but he also prolonged the Depression by raising taxes and cutting spending in 1937. Only the giant stimulus program known as World War II finally ended the Depression. When the private sector is hesitant to spend, the government has to — or no one will.

Here are my comments about Hoover’s austerity and wars as stimulus:

By the way, WWII killed about 500,000 Americans, about 700,000 were injured, many of them for the rest of their lives. That’s a total of around 1.2 million Americans, around 1% of the entire population either decimated or maimed.

I wonder how those people and their loved ones feel the above mentioned author’s “stimulus program” has stimulated their lives?

Also, the WWII years in general were not boom years for the average American at all! They were years of compulsory rationing, government crackdowns, price fixing, 90% taxes, etc.

What did happen was that after the war the federal US government reduced its involvement by two thirds, lifted burdens upon its citizens, and allowed for a dynamic and vibrant market to spring up once more, precipitating what is commonly known as the post war boom with a constantly declining poverty rate until the Great Society programs put an end to that as well.

Tags: austerity, great depression, hoover, the great depression, wars

Protests in Lybia Escalate

February 21, 2011 · Posted in Foreign Policy · Comment

Tags: lybia, protests

Japan’s Debt & Pension Crisis Enters Final Stage

February 20, 2011 · Posted in Global Economics · 1 Comment

To follow up on Keynesianism’s Depredations and Futility in Action, there is more evidence that the train wreck that is the Japanese government is hitting a wall …

Bloomberg writes Japan Must Raise Sales Tax Above 10%, Kan Panel Member Says:

Japan needs to more than double its 5 percent consumption tax to shore up the government’s finances given soaring debt and welfare costs, a member of Prime Minister Naoto Kan’s tax and social security panel said.

“I don’t think an increase to 10 percent is enough,” former Financial Services Minister Hakuo Yanagisawa said yesterday in an interview at his office in Tokyo. “Our discussions must be based on new realities.”

Kan appointed the 75-year-old Yanagisawa to the panel that will meet for the first time on Feb. 5. Yanagisawa, a former colleague of Economy Minister Kaoru Yosano, who is leading Kan’s push for a debate on the sales tax and has advocated doubling the levy. The government is set to issue a plan on shoring up Japan’s social welfare system by June.

Concern over Japan’s rising debt, the largest in the developed world, prompted Standard & Poor’s to cut the country’s credit rating last week. Social security costs in Japan, the world’s most rapidly aging society, have risen more than 60 percent since 2000 and will account for 53 percent of government spending in the fiscal year beginning in April.

Again: In my opinion, if you’re looking for a prediction of economic developments in the US, look to Japan. I think it’s possible that things will happen a bit faster here, but Japan shows us how much the system can be stretched before it has to fold.

Japan’s debt crisis is now approaching its endgame fast. But With all the turmoil going on in the Middle East and in Europe, few people seem to be paying attention …

Tags: japan

“Assault on Public Sector Unions” Long Overdue!

February 19, 2011 · Posted in Government · Comment

Visit msnbc.com for breaking news, world news, and news about the economy

I love it how genius Barack Obama notices that this “seems like more of an assault on [public sector] unions”.

You bet it is! And it’s about friggin’ time!! =))

Tags: public sector unions, unions

Middle East Protests Continue – Bloodshed in Bahrain

February 19, 2011 · Posted in Foreign Policy · Comment

The Times reports Carnage in Bahrain as the Military Opens Fire:

As a heavy moon rose above Bahrain’s Pearl Roundabout, the locus of the island nation’s protest this week, the army opened fire on a group of men who had just sat down for evening prayer. The military fired live ammunition from nearby buildings or from tanks — it was hard to tell because of the ensuing melee. Canisters of tear gas rained down.

The men scattered as they tried to outrun the billowing wave of tear gas. They squatted in the wing of a small mosque nearby, where another reporter and I joined them, seeking refuge. The wails of sirens rent the air. “We were peaceful,” said Hussein Mashkoor, 25, a technical consultant. “Can you see any armed people here? We want a kingdom with a King but where the people have the right to choose their government.”

Wonder what side the US government will be taking here?

From Wikipedia:

The kingdom has a small but well equipped military called the Bahrain Defence Force (BDF). The BDF is primarily equipped with United States equipment, such as the F16 Fighting Falcon, F5 Freedom Fighter, UH60 Blackhawk, M60A3 tanks, and the ex-USS Jack Williams, an Oliver Hazard Perry class frigate renamed the RBNS Sabha. The Government of Bahrain has a cooperative agreement with the United States Military and has provided the United States a base in Juffair since the early 1990s. This is the home of the headquarters for Commander, United States Naval Forces Central Command (COMUSNAVCENT) / United States Fifth Fleet (COMFIFTHFLT), and about 1500 United States and coalition military personnel.

By the way, Bahrain is a country with a largely Shiite population, subjugated by Sunni (US backed and supported) leaders.

Sounds familiar, doesn’t it?

At any rate. It’s refreshing to see the people stand up for their rights in the Middle East and to see this spread like wildfire.

If this isn’t the beginning of some epic blowback to misguided decades of Western meddling in the region, then I don’t know what is or ever could be …

Tags: bahrain

FCC & Net Neutrality

February 18, 2011 · Posted in Interventionism · 2 Comments

Tags: fcc, net neutrality

Patriot Act Extended – Surveillance of Citizens Continues

February 17, 2011 · Posted in Government · 1 Comment

An excellent insight from Susan Lindauer from The People’s Voice who was detained without trial under the Patriot Act for protesting the war in Iraq, she comments on the recent extension of the Act without all those tough talking Tea Partiers putting up any fight (”shocking”, I know! ) …

The Tea Party didn’t even put up a fight. Briefly they rejected a sneak attack to renew three surveillance clauses of the Patriot Act on a suspension vote. That filled my heart with hope. One push from the Republican elite, however and they went down with a loud thud.

My disappointment is particularly acute. Rather notoriously, I am distinguished as the second non-Arab American to face indictment on the Patriot Act, after Jose Padilla.

My status was pretty close to an enemy non-combatant. One would presume that I must have joined some terrorist conspiracy? Or engaged in some brutal act of sedition, such as stock piling weapons and munitions to overthrow those crooks in Congress?

You would be wrong. I got indicted for protesting the War in Iraq. My crime was delivering a warm-hearted letter to my second cousin White House Chief of Staff, Andy Card, which correctly outlined the consequences of War. Suspiciously, I had been one of the very few Assets covering the Iraqi Embassy at the United Nations for seven years. Thus, I was personally acquainted with the truth about Pre-War Intelligence, which differs remarkably from the story invented by GOP leaders on Capitol Hill.

More dangerously still, my team gave advance warnings about the 9/11 attack and solicited Iraq’s cooperation after 9/11. In August 2001, at the urging of my CIA handler, I phoned Attorney General John Ashcroft’s private staff and the Office of Counter-Terrorism to ask for an “emergency broadcast alert” across all federal agencies, seeking any fragment of intelligence on airplane hijackings. My warning cited the World Trade Center as the identified target. Highly credible independent sources have confirmed that in August, 2001 I described the strike on the World Trade Center as “imminent,” with the potential for “mass casualties, possibly using a miniature thermonuclear device.”

Thanks to the Patriot Act, Americans have zero knowledge of those truths, though the 9/11 Community has zoomed close for years. Republican leaders invoked the Patriot Act to take me down 30 days after I approached the offices of Senator John McCain and Trent Lott, requesting to testify about Iraq’s cooperation with the 9/11 investigation and a comprehensive peace framework that would have achieved every U.S. and British objective without firing a shot. Ironically, because of the Patriot Act, my conversations with Senator Trent Lott’s staff got captured on wire taps, proving my story.

You see, contrary to rhetoric on Capitol Hill, the Patriot Act is first and foremost a weapon to bludgeon whistleblowers and political dissidents. Indeed, it has been singularly crafted for that purpose.

This is, by and large, the whole point of any government legislation. You will always hear lots and lots of sugar coating and invocation of morality, ethics, security, stimulus, patriotism, etc.

But all that bureaucrats behind the scenes care about is “How can I get more power?”. More power to summon people, more power to threaten people, more power to bestow privileges/special treatment on those who do me favors, more power to dispense licenses, permissions, etc.

The Patriot Act was a project long in the making. Congress needed a big event to justify it. On 9/11 they got just that, wrapped up in a neat gift basket. In situations of panic and disarray, the indoctrinated masses, devoid of the capacity to think, turn into sheeple. Politicians pounce on that like jackals.

You can’t blame them. For it is the people who believe that the state is necessary who put them in this position. So long as that belief persists in public opinion, one need not act surprised about its inevitable consequences.

Tags: patriot act, police state, surveillance

US Plans to “Aid Democracy” in Egypt

February 12, 2011 · Posted in Foreign Policy · Comment

With all the turmoil in the Middle East, it’s good to see that the US Government has learned a lesson not to repeat the same mistakes of meddling in other countries’ affairs … oh wait …

Now that Hosni Mubarak is getting accustomed to life as an ex-dictator, Barack Obama and his foreign-policy aides have a new task. Washington has publicly called for an Egyptian transition to democracy, which Egypt has never known.

To avoid a continuation of dictatorial rule under a new strongman — or a dangerous power vacuum as weaker players try to seize control — Egypt will need to see the lightning-fast development of long-suppressed political parties.

So the U.S. is preparing a new package of assistance to Egyptian opposition groups, designed to help with constitutional reform, democratic development and election organizing, State Department officials tell TIME. The package is still being formulated, and the officials decline to say how much it would be worth or to which groups it would be directed.

(…)

The Obama Administration cut democracy-and-governance aid to Egyptian opposition groups in its first two years in office, from $45 million in George W. Bush’s last budget to $25 million for the 2010 and 2011 fiscal years. The Obama Administration also stopped providing aid to groups that had not registered with the Egyptian government, drawing criticism from human-rights organizations.

How someone can read/write this stuff and keep a straight face simply amazes me.

So the US government finally begins to wind down its meddling, a peaceful revolution ensues, and the first thing they want to do is step up their meddling again.

Guys, it’s fine. Just once keep your sleazy fingers out this one time. Is it really that hard to just let people live their lives and decide their own destiny?

Just look at Iraq. What has the maximum level of meddling accomplished for the people? Ongoing civil unrests, water and foot shortages and 5-20 Iraqis A DAY dying in battle.

Don’t get me wrong. I have no illusions. I’m merely attacking the abstract moral justifications for this endeavor. I am perfectly aware that foreign aid is in actuality nothing but another way to rip off US taxpayers at minimal to no oversight in order to shovel money into the pockets of lobbyists and contractors.

On, and in case it’s of interest, the US government owes the Egyptians over $34 billion. Go figure …

Tags: egypt, Interventionism

The State and Childhood Memories

February 7, 2011 · Posted in Government, Philosophy · Comment

The lofty fantasy of the State arises in the minds of most people out of childhood memories:

The “Home”land where they feel welcome, safe, and protected; the powerful Father figure embodied in the stern and sublime persona of the President of the country; Lady Justice, the Supreme Court, reviewing and approving of his actions, or rebuking him and his helpers with a wag of the finger when they step out of line; the dinner table of Congress where the children get to voice their demands through altruistic public servants.

What a beautiful, clean, and rational separation of powers we have ourselves there!

Its reality, however, is a lot simpler and a lot less lofty than that: It’s people taking advantage of those deranged fantasies, slipping into the camouflage of all those perfect and imaginary projections, in order to legally extort others at the threat of imprisonment and murder.

Tags: child abuse, childhood, Government, state, statism

Treasuries May Crash, But Shorting Them Isn’t Worth the Risk

February 5, 2011 · Posted in Investing · Comment

By: J. Tyler Matuella

Chasing the Next Treasure-y

Everyone has heard about the famed handful of investors—Michael Burry and John Paulson, amongst others—who saw the real estate bubble forming in the early 2000’s and purchased the lucrative credit default swaps to cash-in when the system collapsed. A couple of those investors made billions in a few months from essentially shorting mortgage-backed securities. Now it seems like there’s a new fad on the Street to discover the next bubble and short it, in hope of making record returns. Many of these hungry investors have turned their beady eyes to the U.S. Treasury market.

Record deficits, the European PIGS, and the Greek debt bailout have put sovereign solvency on the short list of investor concerns since the 2008-2009 financial crisis. Even as the world has seemingly recovered from the dark trenches of the crisis with the resurgence of the equity markets, many investors are still waiting for the real bang.

But they’re not just referring to the Eurozone debt turmoil across the pond. There has been a lot of talk recently about shorting U.S. Treasuries right here at home as sentiment about the unsustainability of the debt has reached a fever pitch.

Real Concerns, Real Consequences

The concerns are valid. Some people are worried that the U.S. government’s ballooning debt, coupled with a decreasing demand for Treasuries as the equity markets heat back up, will force the U.S. government’s borrowing rate to rise.

On a more pessimistic note, other investment analysts think that gridlock in the nation’s political system will prevent the government from passing tax hikes and spending cuts that are needed for the government to rein in the debt—the eventual implication is a Greek-like debt crisis. As Treasury Secretary Timothy Geithner warned in early January, “Even a short-term or limited default would have catastrophic economic consequences that would last for decades.”

Perhaps the best case scenario (for the United States, at least) for the fall of Treasury prices is that there’s a compelling argument for significant inflation in the near future. Massive amounts of increased government spending, tax cut extensions, and record low interest rates indicate that the economic system is flooded with cheap, pent-up money that will have to be spent at some point. When that happens, inflation will take charge and Treasury yields will have to jump to continue attracting investors. But at least the inflation will eat away the value of the U.S. national debt.

Small Upside, Large Downside

Short positions are already risky. Such is the case with any investment that has a finite upside and an unlimited downside—(although the downside of shorting Treasuries is not unlimited since most investors won’t accept large negative yields). Treasuries take the risk to a different level, however, and I will explain why it’s nearly impossible to earn a huge profit from simply shorting a bond or using a credit default swap on U.S. debt.

If bond prices fall, theoretically the return from shorting a U.S. Treasury could be anything from a few cents, to the entire value of the bond if the government defaults. To those who are convinced that Treasuries will tank because the insolvency threat is real and coming, then it doesn’t sound like a bad investment.

But there’s a key problem with that logic. Even though it may seem obvious, U.S. debt is denoted in dollars. That’s a critical distinction from Greek or Portuguese debt, which is denoted in a supranational currency—the Euro—rather that their own national currency. If investors are looking to earn landslide profits from a steep fall of Treasury prices because of rampant inflation or government default, then that very situation will correspondingly come with a huge decrease in the purchasing power of the U.S. dollar. Since U.S. debt is denoted in dollars, the purchasing power of that windfall profit from the Treasury short could drastically reduce the real return, depending on the severity of the price drop. There won’t be an opportunity to protect the profit by converting it to a foreign currency because the dollar value will simultaneously drop as the winnings are earned.

Some investors have bought credit default swaps on U.S. debt that pays in Euros. However, the exact same problem occurs in that situation as well. Large per-trade profit margins for retail investors are restricted because foreign banks will charge a premium, around the time of the crash in Treasury prices, to insure U.S. debt because they’re not only dealing with the chance of default, but also the foreign exchange risk. CDS are even more risky since they only pay out in the event of an actual default, and it’s very difficult to imagine that the U.S. government would choose to default instead of just running the printing presses more.

The chart below shows the nature of the restriction of real return per bond if an investor does a “simple” short on a 10-yr bond purchased at $100 face-value[1]:

Chart

Is It Still Worth It?

Now that we can see there’s inherently only a small to medium upside to shorting the U.S. Treasuries, the question remains, is that limited potential for gains still worth the risk?

The easy answer is that it depends on investors’ risk tolerance. If you’re a big risk taker or someone with lots of cash like a hedge fund, and if you can afford short term losses and don’t mind earning smaller margins per trade, then go for it. The potential for large absolute gains from making high-volume, small-margin trades still exists on a day-to-day basis without harm to the currency. Investors take advantage of small bond price movements every day. However, as I argued before, any large drop in bond prices will be self-defeating and inherently restricting. The “big bang” of profits that investors found in shorting the real estate market in 2008 simply doesn’t exist in the bond market, in part because of the different nature of the financial instruments used.

To more risk-averse investors, trying to profit by day-trading in the bond market may prove particularly difficult, given the current state of world affairs. If the events in Tunisia and Egypt have taught us anything in the past weeks, it’s that the prices of equities and Treasuries are not governed by purely market forces. Between January 25^th and January 30^th, investors exited equity positions and fled to the security of U.S. Treasuries amidst fears that turmoil in the Arab world could roil economic growth and pressure oil supplies.

Even with all of the convincing economic evidence for why bond prices should have been falling, bond prices rose for almost a full week while equities fell. Once investors realized their fears had no economic grounding, bond prices fell back and equities returned to normal. If someone shorted bonds that week, they would have lost a lot of money—the problem is that every economic model in the world couldn’t predict what happened in Egypt.

A Riskier Way to Short the Treasury Market

For small-cap retail investors who are certain that bond prices will fall in the coming months, there’s an alternative to take advantage of the fall in bond prices and still earn a huge return without the currency risk. Some inverse U.S. Treasury ETFs, such as the Horizons BetaPro U.S. 30-Year Bond Bear Plus ETF (HTD), allow investors to use leverage to short the U.S. bond market. This ETF is denominated in Canadian dollars, and it hedges against exposure to the U.S. dollar every day. As long as the investor considers the denominated currency’s home country to be “debt-stable,” then this investment avenue effectively reduces the currency risk.

However, there are some salient problems with investing in inverse ETFs—especially levered ones—from a risk-return standpoint. The returns on a daily basis of HTD, for example, range from +200% to -200% because of the leverage. As a result, holding onto these types of funds for more than a few days can be deadly. Treasury prices may fall for four straight days, earning the inverse ETF investors massive returns with leverage, but only one or two days of small to medium-sized losses later can negate multiple days’ gains, even to the point where the net return on investment is negative. While market fundamentals exhibit compelling evidence for why Treasuries should consistently fall, a little political turmoil around the world could cause Treasuries to rise again short-term and severely hamper the returns from inverse ETFs. Since investors really shouldn’t hold onto these levered inverse ETFs for more than a few days at a time because of the compounding high risk of doing so, investors will have to keenly get into them just before the debt crisis in order to earn massive returns—that is, if a U.S. debt crisis occurs at all.

If You Do It, Do It Right

Going short on bonds probably isn’t the best way to take advantage of a debt downgrade or rising inflation in the U.S. vis-à-vis going long on metals. But for investors who insist on taking the risk, the best way that I have heard to do so is to short the bond, take the money gained from the sale of the borrowed bond, and immediately put it in a forex Euro futures contract. That way, the investor locks in the exchange rate and preserves the purchasing power of the initial investment. Even if the dollar greatly depreciates in the meantime, the investor will still walk away with a solid gain. Depending on how far the bond price falls, the investor could still earn 60-70% per trade, though that size return is highly unlikely. In addition, the risk of betting against the world’s reserve currency over the course of an entire yearlong contract makes it an even riskier position, and perhaps more apparent why shorting Treasuries may not be worth the risk.

If You Play the Game, Know the Risks

The dollar still holds strong as the world’s reserve currency, which could prove an obstacle in the future to investors who short bonds amidst political turmoil in the Middle East. And since large profits (per trade) from shorting bonds are very unlikely even in the event of a debt crisis, it doesn’t make sense for most small-cap, retail investors to play the high risk, low return game that characterizes the bond market. However, for those who insist on profiting from shorting the potential debt crisis in the United States, doing a regular short and putting the initial payout in a forex Euro futures contract may be the best way to produce solid returns with minimal currency risk.

[1] Real return numbers are not exact at each bond price increment; may differ with different levels of inflation.

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