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Us economic focus
- 1. Focus on US Economy
- 2. Federal Reserve Asset Balloon • The Fed: – Took a lot of toxic debt load onto its own books – Has, since QE2 been purchasing US bonds (treasuries) to as much as $100 billion/month – Result is massive drawdown of its income and massive increase of perhaps worthless “assets” on its books – Fed also lowered interest rates to essentially zero
- 8. What happens next? • A QE3 begins – Signal will be that dollar is to be sacrificed – Other buyers will back away without more interest to justify the risk • No QE3 further easing – The government needs to find new treasury buyers – Which will require higher interest – Which makes the debt more burdensome
- 10. Possible reason of slower spike • Suspicion declining dollar is due for rebound among investors • Treasuries still seen by many as place to park serious money in downturn • Ending “easing” will give some more hope that saner well-based policies are forthcoming • The end of easy money will likely cause a move out of stocks and possibly into Treasuries
- 12. Survive the 20 year downturn • Produce more than you consume, save the excess – Avoid consumption craziness • Own gold and silver – No longer cheap but headed higher • Watch out for manias and panics • Diversify assets and yourself geographically – Your government is likely your biggest risk
- 13. Energy Update • Japan nuclear scare is likely to mean “no new nukes” • Japan reconstruction cost now estimated at $300 billion • Natural gas is much cheaper than nuclear or oil in the US – New finds of a lot of natural gas in US • Middle East unrest continues to eat into oil supply
- 14. Libya conflict • Ferocity of bombing raids has turned off many Arab states including SA • Troops in Libya are a likelihood – CIA operatives involved now • We are losing influence relative to the apolitical Chinese market actions in region • The all too obvious motive for US actions is oil
- 15. Not just Libya
- 16. It is about Energy • Expect resource wars – Already begun on small scare • Energy is vital to every country’s economy – Prosperity directly related to energy access – Economic abundance is built on energy abundance
Notes de l'éditeur
- Note that the undelying problems have not really been resolved. The base of the crisis is a mountain of unpayable debt. The “solutions” to date have been to add massively more debt on top of this. So the underlying problem of a mountain of bad debt has actually gotten much worse.The deep problem of government spending is not being addressed at all. As we saw last week, the new budget agreement cuts only $29 billion. This week that has been further whittled to less than a (today) paltry billion.For instance all the budget balancing proposals to date ignore our huge military spending which is fast approaching 5% of GDP alone.
- In this chart we see the rise of the monetary base since 1985. The monetary base of an economy is the amount of actual currency or highly liquid assets in circulation. The US money based has increased 6-fold in this period with the majority of the increase in response to the 2008 economic crisis where the proverbial hockey stick goes nearly straight up.
- Purchasing power of the dollar falls and falls..
- Here we have several currencies measured in terms of the price of gold. Note that the US dollar is dropping much faster than the Euro, Yen or Australian dollar.That all currencies are depreciating is a sign of growing distrust of fiat currencies and the current economy and is exacerbated by the pressure to not depart to far from the behavior of the reserve currency.
- As currencies become questionable and economic trouble ensue money moves into tangibles, into commodities. This combines with rising demand from the superheated Asian economies. Also note that oil is denominated in US dollars.Clearly something is going to break.Given the over-large role the Fed has been playing in this crisis – by manipulating interest rates and bailing out banks, by buying up over a trillion dollars in toxic mortgages and, finally, by directly monetizing the government’s spending by creating money from thin air in order to buy Treasuries – it is critical to pay close attention to Fed policy at this critical juncture.While the Fed, through its many actions, has shown a willingness to ignore the well-being of the public in favor of its friends in high places, even Bernanke and Co. can’t ignore the building consequences of their actions forever.
- The Fed is ultimately judged over preserving the dollar. If it falls off a cliff then they lose all crebidility.
- The line in black here is the interest rate on a 10 year treasury. Note that it has fell with announcement of QE2 and is likely to fall much more if there is further “easing”.
- As far as the Fed is concerned, it has done exactly what Chairman Ben Bernanke has said it would do – shower the economy with dollars. By stepping away from the quantitative easing, Bernanke begins to act on part two of his monetary hypothesis; that the Fed can mop things up before the dollar dies and inflation runs out of control.At this point, seeing that the dollar is crashing and inflation and interest rates are already on the rise, the Fed’s hand is being forced. It really has no option but to step aside and hope for the best.
- This chart shows the price in gold relative to all these Fed actions. As the currency continues to lose value and the market continues to lose confidence and especially as Treasuries slight gold (and silver) will continue to rise.Once the Treasury auctions have soaked up the easy money looking to play a rebound in the dollar, interest rates should start to rise, and continue rising.At that point, the Fed will almost certainly be pressed to rush back into the breach with QE3, and the waterfall crash in the dollar begins again, with interest rates rising to offset the losses.Conversely, if the Fed sits on its hands as the government shovels out more and more debt, interest rates will also rise… begetting even higher rates, and the economy’s death spiral begins.In other words, pretty much every way you look at it, the dollar is doomed and hard assets will soar. The rock is now heading towards the hard place, no matter what the Fed does.
- No new nukes is insane of course but it is the way the wind is blowing. As we have already seen a once in 300 year disaster to a nearly 40 year old plant led to not so terrible results. Many types of newer designs are orders of magnitude more failproof but are unlikely to be built in a time of anti nuclear hysteria.
- It took only about a month for Libya to transition from a country with a few largely peaceful protests to being the target of an attack by a coalition led by the United States.The United Nations passed a resolution with the relatively mild goal of creating a "No-Fly Zone," but only two days later, 150 Tomahawk missiles were launched on specific targets throughout Libya while French warplanes dropped bombs.Even though President Obama had said the United States would not use its own airplanes over Libya, one was quickly shot down.Absent NATO “boots on the ground” – and NATO is entirely dependent on the U.S., its single largest sponsor – it’s increasingly looking like the conflict in Libya could drag on.Even if Gaddafi goes, the ability of the U.S. to continue winning deals for oil against the apolitical Chinese and others is going to be severely hampered.The decision by an U.S. administration to once again attack another nation without first obtaining congressional approval as required by the Constitution confirms our country is slipping into an End-of-Empire pattern, with power being concentrated into the administrative branch.
- The blue stars are MENA countries where protests have erupted, with the red stars indicating where regime change is occurring.Saudi Arabia’s long-standing relationship with the U.S. took a turn for the worse in the first week of April when that country announced that a $60 billion arms purchase was being put on hold.Underscoring their displeasure with the U.S., the Saudis simultaneously reached out to China and Russia for alternative sources of military equipment.At the heart of their displeasure, it seems, was the U.S. government’s about-face on Mubarak of Egypt, shifting from long-term ally one day to shoving him under the bus the next.Similarly, the U.S. flipped its position related to Yemen, which sits on the Saudis’ southern border, and are now publicly stating that Saleh, ruler for four decades, should step down.The Tunisian leader is out.Mubarak is out of Egypt, with the military in charge. Their military has had close ties with the United States military for decades, as we provided $1.5 billion annually to their regime.there are increasing reports of the Egyptian military cracking down on members of the protest movement, making it clear that the situation is far from settled.In Yemen, the leader has promised to step down, but he's been slow in complying, and protests have become violent.Bahrain experienced significant protests from its Shiite majority demanding more of the pie from their Sunni leaders.Saudi Arabia crossed over their shared border with Bahrain to assist in forcefully putting down the protesters, with 50 deaths as the result.Syria – The Syrian president refuses to step down, even though his cabinet has resigned and the protests there have become very largepHe rules in the shadow of his father's extreme reaction to protests several decades ago, when 30,000 to 80,000 protesters were killed.Recent reports indicate he is willing to follow his father’s tough policies, with scores of protestors killed. In Jordan, there are clear indicators of growing conflict, with a protestor dying as a result of an attack by security forces who moved in to break up clashes between reformists and supporters of King Abdullah.Ivory Coast – The country’s leader has been deposed by the opposition, supported by UN and French attack helicopters. It seems any country that might have oil is a ready target, even if the issue is a conflict over vote counts.Afghanistan – Based on statements by U.S. government officials, it is clear the U.S. and its allies don't know what they are doing there, or what they hope to gain by remaining.
- This shows the data for a wide swath of countries arrayed by their economic strength across the horizontal scale, and their energy usage on the vertical scale. The data are per capita to make them comparable across nations. There is a strong relationship between the two, as indicated by the red arrow across the middle of the data.
- The bright spot in the group is natural gas. Because of the new fracking techniques, we have an abundant supply driving the price down in the U.S.
- The chart shows the price of oil using the left scale and the price of natural gas using the right scale. A barrel of oil produces 5.8 times as much energy as 1,000 BTU of natural gas. So the chart shows a green line with the natural gas price multiplied by 5.8 and on the same left scale as crude. Up until 2006 when the new technologies helped revolutionize gas extraction, oil and gas prices by this measure tended to move in tandem.There even were a few spikes when natural gas rose above crude oil. But now natural gas is only 25% as expensive as crude.