by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)
To counter the increasing demands that government reduce its micromanagement of the economy, last week the Obama Administration offered a fig leaf in the form of a white paper entitled “Reforming America’s Housing Finance Market.” In addition to marking the official end of the Bush era “ownership society,” where increasing the level of home ownership was a national priority, the document contains a recommended regulatory overhaul of the Federal Housing Authority (FHA) as well as Fannie Mae and Freddie Mac (together known as Government Sponsored Enterprises “GSE’s”), that intends to bring the share of government owned home loans from the current 95% to 40% over the next 5-7 years.
In the report, the Obama Administration makes the important admission that government interference in housing had dangerously distorted the market. And, while the goal of reducing the government’s footprint in the housing market is certainly laudable, the reform plan is not only too little too late, but fails miserably to address the nucleus of the problem. Even if all the recommendations are adopted, the government would actually extend its explicit guarantees to bail out failing lenders. Most importantly, the proposal completely overlooks the most significant government distortion of the housing market: the Federal Reserve’s manipulation of interest rates. Thus, this plan will insure that government’s role in the mortgage market will likely expand in the years ahead.
Quote of the Day: “Worrying works. About 90% of the things I worry about never happen.” — Woody Paige, on ESPN’s “Around the Horn”
Congress is going to raise the debt ceiling yet again. They’ve done this 70 times in the past, but this next time should be the last time.
We’ve created a new campaign to help to achieve this. The Republicans are pushing a Balanced Budget Amendment that has some great features. It would . . .
* mandate that Congress balance the federal budget each year.
* prevent Congress from spending more than 20% of Gross Domestic Product.
* require a 2/3 super-majority to increase your taxes.
This would mean that . . .
* the debt ceiling would never be raised again.
* the State’s cancerous growth would be checked.
* it would become almost impossible to raise federal taxes.
Here’s the deal . . .
If Congress (wrongly) insists on lifting the debt ceiling yet again, then they need to give us something in exchange.
What we need in exchange is a strong Balanced Budget Amendment.
To ensure that this is the last time they raise the debt ceiling, we need a strong Balanced Budget Amendment.
by John Browne, Senior Market Strategist at Euro Pacific Capital
This week, the financial media celebrated as the Dow closed above the 12,000 mark for the first time since June 19th, 2008. For many, this milestone is another sign that the financial nightmare of the past three years will soon fade in the rearview mirror.
The euphoria over share prices has been bolstered by recently released data which catalogs rising consumer confidence and spending, and corporate earnings reports that have beaten estimates. In the meantime, the bond markets have remained resilient, despite evidence of massive public debt problems that bubble beneath the surface. But is this optimism based upon enough sound evidence to support long-term investment?
The recovery in the Dow, to within some 15 percent of its all-time high, should not be much of a surprise to our readers at Euro Pacific, nor should it count as a mark of confidence to anyone. We have always held that ultra-low interest rates distort the investment landscape by forcing yield-starved investors from bonds into equities. Driven by this massive government subsidy, along with a high real rate of inflation, the stock market cannot help but rally. Indeed, the only surprise is that our current rally took so long to develop.
The rally even appears to be immune to the uncertainties created by the unrest in Egypt, which is arguably the largest global political crisis we have seen since the invasion of Iraq in 2003. The big question is: can this rally be trusted for the longer-term? Three factors highlight the risks.
by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net).
In current economic analysis, inflation is largely in the eye of the beholder, and depending on how you choose to look, very different stories emerge. In the U.S., food and beverages count for just 16.4% of the CPI calculation. The Chinese apparently believe that the basic necessities of life should count for more, assigning a 33% weight to the nutritional components. These differences in measurement are partially responsible for the divergent inflation climate in both countries, and make most people believe that inflation is fickle and localized. From my perspective, inflation is a global wave that will ultimately swamp all shores.
As the world’s economic leaders gather in Davos Switzerland, much of the discussion has been focused on a report jointly issued by the Global Economic Forum and McKinsey & Co. which forecasts a $100 trillion increase in global debt in the coming decade. The authors of the report argue that such an increase will be needed to maintain global economic health. Strangely, while acknowledging how the massive increase in credit caused the global financial crisis of 2008, the report’s authors admit no fear of even greater leverage today. They conclude: “Credit is the lifeblood of the economy, and much more of it will be needed to sustain the recovery and enable the developing world to achieve its growth potential.”
But the global credit stock has already doubled from $57 trillion in 2000 to $109 trillion in 2009, with disastrous consequences. The WEF report wouldn’t be so alarming if it wasn’t emanating from a gathering of global central bankers, business leaders and politicians. These are, unfortunately, the folks with all the power to turn these ideas into reality.
After the mostly nauseating SOTU speech by Obama… I noticed that Rand Paul’s press release earlier today announcing his bill to cut spending by $500 billion in 1 year. Not only that but he posted the bill itself along with a 37 page overview with highlights of specific departments/funding he would cut. It’s quite interesting to read and rather bold. In other words… I love it.
Yes, it will never pass, but I still love it.
Some highlights if you are not interested in opening the pdf linked above (though I recommend it because he explains why the cuts can be made):
Legislative Branch – Cut by 23%
Judicial Branch – Cut by 32%
Dept. of Agriculture – Cut by 30%
Dept. of Commerce – Cut by 54%
Military/Dept. of Defense – Cut by 6.5%
Dept. of Education – Cut by 83%
Dept. of Energy – Cut by 100%
Health and Human Services – Cut by 26%
FDA – Cut by 62%
CDC – Cut by 28%
NIH – Cut by 37%
TSA – Cut by 40%
Housing and Urban Development – cut by 100%
Eliminate Amtrak Subsidies
EPA – Cut by 29%
International Aid – Cut by 100%
NASA – Cut by 25% (mentions fostering private space exploration/tourism)
Senator Rand Paul has issued his own response to Obama’s State of the Union speech tonight.
This came after issuing a press release announcing that he has introduced his own plan to slash the federal budget by $500 billion dollars in 1 year.
WASHINGTON, D.C. – In the face of an ever-expanding national debt, newly elected Senator Rand Paul is taking a bold and proactive step in protecting our national security and lowering our deficit. By introducing $500 billion in spending cuts today – to be enacted over one year – Sen. Paul is starting an important conversation with his Senate colleagues about how to fix our nation’s current economic situation.
“I am proud to introduce my own solution to the mounting debt our spendthrift, oversized government has accrued. By rolling back to 2008 levels and eliminating the most wasteful programs, we can still keep 85 percent of our government funding in place,” Sen. Paul said today.
“By removing programs that are beyond the constitutional role of the federal government, such as education and housing, we are cutting nearly 40 percent of our projected deficit and removing the big-government bureaucrats who stand in the way of efficiency in our federal government,” he continued.
Rand Paul understands what ails us and appears to have the proper solutions. Obama appears to know what ails us, but offers more of the same old failing solutions. More information is available on Rand Paul’s web site, including the text of his spending cut bill.
by John Browne, Senior Market Strategist at Euro Pacific Capital
If one were asked to describe the major global economic changes that have unfolded since the financial crisis began, a good starting place would be the massive shift of debt from the private to the public sector. Attempting to arrest a deepening crisis, governments all around the world have bailed out businesses and companies by transferring bad debts to the public books. Although these moves have provided some current stability (after all, governments are much less likely to default), the long-term consequences may be dire.
Two of the world’s largest economies, the EU ($16 trillion) and the US ($14 trillion), have become the leading practitioners of private-to-public debt shifting. The US has assumed the debts of banks, insurers, mortgage holders, and even entire industrial sectors. The European Union has done the same for entire states. The resulting public debt levels are, predictably, placing strains on both the dollar and the euro.
Worse still, the bailouts have created a spirit of apathy toward debt accumulation. Western governments have embarked on a debt binge for the ages. Already, the credit ratings of the United States and some of the EU’s core countries, such as France and the UK, are being questioned.
While this socialization of private debt has created deep citizen resentment, it remains to be seen whether political pressure is enough to hold back the tide. In the US, the forces of fiscal restraint appear to have the upper hand at present; but, this late in the game, it is far from certain that the newly elected fiscal hawks will be able to avert civil unrest and debt default.
Many states can’t pay their bills. Their unfunded obligations total trillions of dollars. Some of these states will want a bailout from Congress. Do you want to pay for this, or should the politicians and the unions who created these messes feel the pain instead of you?
Liberty Maven
by John Browne, Senior Market Strategist at Euro Pacific Capital
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