Mayday! Mayday! Mayday!
This weeks offering, submitted for your acceptance and approval... and could be titled Time to "Pay the Piper", "Take your Medicine" or "Face the Music". In these pages we have touched on the old saw: "What’s good for General Motors is good for America".
Charles Wilsons metaphor is from our glory days, which are now past due to global labor arbitrage or labor at the margin, which has hollowed out our manufacturing base.
We have also touched on the new saw, " Whats good for the Beast from Bentonville, WalMart, is NOT good for America".
A certain Naybob of simian nature has brought the latest missive from Pimco's Bill Gross to our attention.
Mr. Gross's missive contrasts the old saw of GM to the current systemic economic problems we as a nation are having and suggests possible courses of action.
"...diminished labor cost competitiveness and excessive future unreserved liabilities are descriptive of both GM and the U.S. economy, GM’s efforts to survive and ultimately prosper should be our own as well."
The potential courses of action include:
1. U.S. Treasury or Federal Reserve policies aimed explicitly at depreciating the dollar.
2. Maintaining a substantive period of low real interest rates compared to history.
These two strategies would acheive a "rather drastic rebalancing of wage rates compared to primarily Asian competitors".
Regarding reducing the governments benefit liabilities burden: "the way a reserve currency nation gets out from under the burden of excessive liabilities (read Social Security and Medicare) is to inflate, devalue, and tax".
Regarding a attempt at national retooling with an already hollowed out manufacturing base: "the primary export we have that can be made more attractive are our Treasury bonds in the form of higher relative yields".
But, higher yields mean higher interest rates. We think the period of ultra low interest rates is slowly coming to an end through the Fed's actions, and ultimately through the markets actions. More on this later.
"Owners of these (bonds) liabilities (either existing/future debt holders, or tax paying corporations/citizens) will likely be the sacrificial lambs of the future...
...they will watch U.S. inflation erode their principal and on top of that the real dollar value of their global purchasing power will decline as the dollar sinks."
And as we well know this is the method through which central banks also rob their citizens blind, while masking the situation in the short term through asset hyper inflation (read stocks and the real estate bubble).
Finally the inevitable conclusion: "Higher inflation, higher personal and corporate taxes, and a lower dollar point U.S. and global investors away from U.S. assets and toward more competitive economies less burdened by health and pension liabilities...
...those personified by higher savings rates and investment as a percentage of GDP. Need I say more than to sell U.S. assets and buy Asian ones denominated in their local currencies.??"
We know from his past missives that Mr. Gross always butters his own bread. Pimco has purchased and holds BILLIONS in FOREIGN BONDS and has a vested interest in steering the market in this direction.
But, if the publicly anoited "KING OF BONDS" is infering this strategy, what do you think other "investor" nations that hold large amounts on US Treasuries, such as China & Japan are thinking?
One of our mantra's has been "don't go against the dollar". But, witnessing this quarter, going against the dollar and with gold has been a good strategy.
Based on the above assertions which are not only held by Mr. Gross, one might infer that we are in for:
1. higher taxes
2. massive budget cuts
To quote from the OMB on social security, the Nation's Fiscal Outlook for 2007: "No plausible amount of cuts to discretionary programs or tax increases can help us avert this major fiscal challenge...
by 2040 Federal spending will accelerate to a level at which mandatory outlays and debt service would consume all Federal revenue...
By 2070, if we do not reform entitlement programs to slow their growth, the rate of taxation on the overall economy would need to be more than doubled, placing a crushing burden on the economy."
So, we can assume from the above statement that TAX INCREASES and BUDGET CUTS will NOT solve the problem. To be sure, regardless of the above OMB statement, we will see budget cuts and higher taxes. This begs the question, what REAL options remain??
1. A serious devaluation of the dollar. (Bare in mind that in 04 the dollar sunk to 1.38 vs the Euro, then during 05 rebounded to 1.15, and currently has fallen to 1.26).
The question is how much further will the dollar fall and vs. which currencies?
We know that the financial sector has an inherent conflict of interest with durable economic expansion.
We also know that because of this conflict of interest, easy capital is a coward and gravitates to the highest yield with the lowest risk, regardless of the long term consequences.
2. Higher bond yields to keep foreign investors buying our bonds, and thus higher interest rates. (Fed rates have risen from 1% to 5%, but 30 year mortgage rates have only gone from 4% to 6.5%, so far...),
As a function of a " free market" (we believe Adam Smiths theory is in this day and age a canard and academics fairy tale), bond yields will have to go much higher than they are now.
The question is how high will those interest rates go and for how long as our "investors" slowly divest and diversify their portfolios?
And, if rates go higher, even for a short period, our future debt service will go higher, which means the US government will have to implicitly DEFAULT on these obligations by further devaluation of the currency.
If rates do not continue to go higher, the investors capital will gravitate elsewhere. This exodus or diversion of capital will cause a deflation in the asset pricing structure.
If rates do go higher, the main source of economic growth (the housing sector) will be slowly cut off. Either way, the underlying real estate bubble gets deflated and the "new" economy tanks.
The only "way out" is an equilibrium interest rate level which keeps foreigners buying bonds and supporting the dollar, but doesn't choke off the housing sector or shave too much off its underlying asset values. Is this possible? Time will tell if "Goldilock's" shows up at the door.
In essence, through debauchery and low real interest rates, our government has and is explicitly PROMOTING INFLATION via increased budget deficits and loose monetary policies.
This is contrary to the very mantra that the Fed has, and is a total disconnect from what they are supposedly being "vigilant" against. Remember the ONLY lever the Fed has is low end interest rates.
Another inescapable result of all this will be, something else we have touched on in the past, our real wages and standard of living will be seriously reduced in the future.
And as we have maintained in the past in, A Durable Economy? and Economic Growth & Lower Interest Rates; Meet the New Boss and Name of the Game series: our children will be left with a future of serfdom and a lack of sovreignty.
One last question you have to ask yourself: Isn't this "bank" orchestrated "debentured" sellout of our interests and future, a codified treason? And if it isn't, shouldn't it be?
Charles Wilsons metaphor is from our glory days, which are now past due to global labor arbitrage or labor at the margin, which has hollowed out our manufacturing base.
We have also touched on the new saw, " Whats good for the Beast from Bentonville, WalMart, is NOT good for America".
A certain Naybob of simian nature has brought the latest missive from Pimco's Bill Gross to our attention.
Mr. Gross's missive contrasts the old saw of GM to the current systemic economic problems we as a nation are having and suggests possible courses of action.
"...diminished labor cost competitiveness and excessive future unreserved liabilities are descriptive of both GM and the U.S. economy, GM’s efforts to survive and ultimately prosper should be our own as well."
The potential courses of action include:
1. U.S. Treasury or Federal Reserve policies aimed explicitly at depreciating the dollar.
2. Maintaining a substantive period of low real interest rates compared to history.
These two strategies would acheive a "rather drastic rebalancing of wage rates compared to primarily Asian competitors".
Regarding reducing the governments benefit liabilities burden: "the way a reserve currency nation gets out from under the burden of excessive liabilities (read Social Security and Medicare) is to inflate, devalue, and tax".
Regarding a attempt at national retooling with an already hollowed out manufacturing base: "the primary export we have that can be made more attractive are our Treasury bonds in the form of higher relative yields".
But, higher yields mean higher interest rates. We think the period of ultra low interest rates is slowly coming to an end through the Fed's actions, and ultimately through the markets actions. More on this later.
"Owners of these (bonds) liabilities (either existing/future debt holders, or tax paying corporations/citizens) will likely be the sacrificial lambs of the future...
...they will watch U.S. inflation erode their principal and on top of that the real dollar value of their global purchasing power will decline as the dollar sinks."
And as we well know this is the method through which central banks also rob their citizens blind, while masking the situation in the short term through asset hyper inflation (read stocks and the real estate bubble).
Finally the inevitable conclusion: "Higher inflation, higher personal and corporate taxes, and a lower dollar point U.S. and global investors away from U.S. assets and toward more competitive economies less burdened by health and pension liabilities...
...those personified by higher savings rates and investment as a percentage of GDP. Need I say more than to sell U.S. assets and buy Asian ones denominated in their local currencies.??"
We know from his past missives that Mr. Gross always butters his own bread. Pimco has purchased and holds BILLIONS in FOREIGN BONDS and has a vested interest in steering the market in this direction.
But, if the publicly anoited "KING OF BONDS" is infering this strategy, what do you think other "investor" nations that hold large amounts on US Treasuries, such as China & Japan are thinking?
One of our mantra's has been "don't go against the dollar". But, witnessing this quarter, going against the dollar and with gold has been a good strategy.
Based on the above assertions which are not only held by Mr. Gross, one might infer that we are in for:
1. higher taxes
2. massive budget cuts
To quote from the OMB on social security, the Nation's Fiscal Outlook for 2007: "No plausible amount of cuts to discretionary programs or tax increases can help us avert this major fiscal challenge...
by 2040 Federal spending will accelerate to a level at which mandatory outlays and debt service would consume all Federal revenue...
By 2070, if we do not reform entitlement programs to slow their growth, the rate of taxation on the overall economy would need to be more than doubled, placing a crushing burden on the economy."
So, we can assume from the above statement that TAX INCREASES and BUDGET CUTS will NOT solve the problem. To be sure, regardless of the above OMB statement, we will see budget cuts and higher taxes. This begs the question, what REAL options remain??
1. A serious devaluation of the dollar. (Bare in mind that in 04 the dollar sunk to 1.38 vs the Euro, then during 05 rebounded to 1.15, and currently has fallen to 1.26).
The question is how much further will the dollar fall and vs. which currencies?
We know that the financial sector has an inherent conflict of interest with durable economic expansion.
We also know that because of this conflict of interest, easy capital is a coward and gravitates to the highest yield with the lowest risk, regardless of the long term consequences.
2. Higher bond yields to keep foreign investors buying our bonds, and thus higher interest rates. (Fed rates have risen from 1% to 5%, but 30 year mortgage rates have only gone from 4% to 6.5%, so far...),
As a function of a " free market" (we believe Adam Smiths theory is in this day and age a canard and academics fairy tale), bond yields will have to go much higher than they are now.
The question is how high will those interest rates go and for how long as our "investors" slowly divest and diversify their portfolios?
And, if rates go higher, even for a short period, our future debt service will go higher, which means the US government will have to implicitly DEFAULT on these obligations by further devaluation of the currency.
If rates do not continue to go higher, the investors capital will gravitate elsewhere. This exodus or diversion of capital will cause a deflation in the asset pricing structure.
If rates do go higher, the main source of economic growth (the housing sector) will be slowly cut off. Either way, the underlying real estate bubble gets deflated and the "new" economy tanks.
The only "way out" is an equilibrium interest rate level which keeps foreigners buying bonds and supporting the dollar, but doesn't choke off the housing sector or shave too much off its underlying asset values. Is this possible? Time will tell if "Goldilock's" shows up at the door.
In essence, through debauchery and low real interest rates, our government has and is explicitly PROMOTING INFLATION via increased budget deficits and loose monetary policies.
This is contrary to the very mantra that the Fed has, and is a total disconnect from what they are supposedly being "vigilant" against. Remember the ONLY lever the Fed has is low end interest rates.
Another inescapable result of all this will be, something else we have touched on in the past, our real wages and standard of living will be seriously reduced in the future.
And as we have maintained in the past in, A Durable Economy? and Economic Growth & Lower Interest Rates; Meet the New Boss and Name of the Game series: our children will be left with a future of serfdom and a lack of sovreignty.
One last question you have to ask yourself: Isn't this "bank" orchestrated "debentured" sellout of our interests and future, a codified treason? And if it isn't, shouldn't it be?
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