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.
by John Browne, Senior Market Strategist at Euro Pacific Capital
Following the huge gains made by Republicans in the midterm elections, it was widely expected that President Obama would use the State of the Union address to signal a major policy shift toward the center of the political spectrum. On the surface, at least, he appeared to do just that, hinting that he took budget management very seriously and that Americans should be prepared for shared sacrifice. However, as the final applause still echoed in the House chamber, many astute pundits were left trying to make sense of the many contradictory policy prescriptions the President proffered.
Classical political maneuvering dictates that when clouds are grey, politicians must offer good news, tell jokes, and remind us warmly of our childhood (or in Obama’s version, America’s triumph over Russia in the Space Race). Disclosure of specific measures should be avoided at all costs. President Obama followed these tactics closely.
While he did address plans to cut non-defence, discretionary federal spending – a small fraction of the overall budget – the President also announced his intention to increase spending on several existing and new initiatives. The scope of the new initiatives will surely eclipse the modest cuts pledged.
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.
Quote of the Day: “…a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government, and this is necessary to close the circle of our felicities.” – Thomas Jefferson
The cuts would total $2.5 trillion over ten years. Some of that amount could be based on rosy scenarios. It’s certainly true that cuts to defense and entitlements must still be made to balance the books, but this bill is still an important first step. It means . . .
by Peter Schiff, CEO of Euro Pacific Capital, and host of The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 6pm – 8pm Eastern time every weeknight, and streaming at www.schiffradio.com
The global economy has become so unbalanced that even government ministers who would normally have trouble explaining supply or demand clearly recognize that something has to give. To a very large extent the distortions are caused by China’s long-standing policy of pegging its currency, the yuan, to the U.S. dollar. But as China’s economy gains strength, and the American economy weakens, the cost and difficulty of maintaining the peg become ever greater, and eventually outweigh the benefits that the policy supposedly delivers to China. In the first few weeks of 2011 fresh evidence has arisen that shows just how difficult it has become for Beijing.
Twenty years ago, China’s leaders decided to ditch the disaster of economic communism in favor of privatized, export-focused, industry. The plan largely worked. Over that time, China has arguably moved more people out of poverty in the shortest amount of time in the history of the planet. But somewhere along the way, China’s leaders became addicted to a game plan that outlived its usefulness.
In order to maintain the peg, China must continually buy dollars on the open market. But the weaker the dollar gets, the more dollars China must buy. And with the U.S. Federal Reserve pulling out all the stops to create inflation and push down the dollar, Beijing’s task becomes nearly impossible. Last week, it was announced that China’s foreign exchange reserves, the amount of foreign currency held at its central bank (mostly in U.S. dollars), increased by a record $199 billion in 4th quarter 2010, to reach $2.85 trillion. These reserves currently account for a staggering 49% of China’s annual GDP (if the same proportional amount were held by the U.S., our measly $46 billion in reserves would have to increase 163 times to $7.5 trillion).
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?
by John Browne, Senior Market Strategist at Euro Pacific Capital
While the markets have known for almost three months that the 2010 election delivered the House of Representatives to the tea-infused Republican Party, I did expect a greater reaction on Wall Street to the formalities of the opening sessions of Congress yesterday.
If the Republicans make good on their campaign promises, we will see cuts in government spending and an end to fiscal stimulus. Given that short-term stock market performance is very much dependent on such government assistance, the current rally is hard to fathom. Meanwhile, gold and silver have experienced a counterintuitive correction (although to be honest, pundits are making much more of this 4% pullback than the size of the move merits). Could it be that the markets now believe that fiscal restraint in Washington is the best pathway to growth? Can a leopard really change his spots?
Not likely, I say. Rather, I believe that we are simply seeing some short-term momentum. Speculators tend to buy and sell on momentum, while investors tend to accumulate on dips and sell on fundamental changes. Anyone with a pragmatic view of Washington must realize that real change is unlikely.
The 112th Congress was sworn in yesterday. As expected John Boehner became the new Speaker of The House. Senator Rand Paul and Congressman Ron Paul made several media appearances together.
First, Ron and Rand appeared together on ABC Morning News with George Stephanopoulos:
Neil Cavuto talks to father and son in a more lighthearted discussion but ultimately they discuss raising the debt ceiling and economics. At one point Ron Paul laughs at the nibbling around the edges and says, “I want to repeal the whole government.” Good old Ron.
Liberty Maven
by John Browne, Senior Market Strategist at Euro Pacific Capital
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