"We Are All Greeks" (Updated)

The Federal Reserve Open Market Committee met this week and held to the major tenets of its monetary policy. Rates will remain unchanged at near zero; Operation Twist will continue to extend purchases of longer-term Treasuries; language that rates will remain exceptionally low through mid-2013; and principal payments from its holdings of agency debt will be reinvested in agency mortgage-backed securities. The Committee anticipates “a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually.” The statement also said that the FOMC “anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate (inflation and employment) as the effects of past energy and other commodity price increases dissipate further.”

At the margins, the economy is clawing its way back. But the modest gains reported this week regrettably do not portend an end to the malaise this great economy suffers.  Regardless of what the administration and the Federal Reserve say, there is no way this economy resumes its potential until debt and deficit spending are addressed both here and abroad. We must endure the painful consequences of reversing decades of excess. There is NO magic medicine.

Erskin Bowles, co-leader of President Obama’s fiscal commission told the congressional supercommittee seeking a $1.5 trillion debt-reduction package, “I’m worried you’re going to fail.” The 12-member panel is just three weeks away from its deadline with no agreement in sight.

Former Senator Pete Domenici of New Mexico, a Republican, criticized Democrats who oppose changes to Medicare and Republicans who refuse to accept tax increases. “They are both complicit in letting America destroy itself, in letting this great democracy destroy itself because we don’t want to make tough decisions,” Domenici told the supercommittee. “I hope you heard that.”

Chuck Bently of Crown Financial Ministries notes that Veronique Riches-Flores of France’s largest bank, Societe Generale, recently entitled her analysis of the crisis, “We are all Greeks.” According to Bently, “she was bluntly pointing out that the member nations of the Organization for Economic Cooperation and Development (OECD) all have unsustainable levels of debt. Essentially she made the case that both the US and European nations are facing tough choices ahead and that she foresees the need for austerity plans in most of the Western world.”

The hour has come, for this country and Europe, which are rushing headlong into the abyss, to deal with, not only debt and deficit spending, but more importantly, the pathalogical spending beyond means. It is an attitude particularly ingrained in our political system. Democrats and Republicans stand diametrically opposed on the role of government. Each year as they debate the so-called budget, they undertake an impossible mission; to reconcile small government and large government. When they fail, as they inevitably always will, they simply spend amounts they must on each side to re-gain election and pass the self-serving spending excesses onto the next Congress and the mounting debt to future generations.

We are all Greeks and our future is unfolding before our very eyes in Europe. We united as a country to save ourselves from a $5.00 fee banks were going to charge us for using our debit cards to spend our own money. The quesiton in the coming year is; will Americans unite to save ours and future generations from a growing and crippling dependence on government? Will we allow ourselves to be distracted by the political sideshow that is "Occupy Wall Street" while the largest and most corrosive corporate monopoly in the land - Washington DC - grows ever more powerful? Next November we will know whether this country will remian on the smooth downhill road to Greece, or the difficult road less traveled. The Greeks have given us Democracy and a warning. Here's praying we use the first to heed the second.

We Are All Greeks

The Federal Reserve Open Market Committee met this week and held to the major tenets of its monetary policy. Rates will remain unchanged at near zero; Operation Twist will continue to extend purchases of longer-term Treasuries; language that rates will remain exceptionally low through mid-2013; and principal payments from its holdings of agency debt will be reinvested in agency mortgage-backed securities. The Committee anticipates “a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually.” The statement also said that the FOMC “anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate (inflation and employment) as the effects of past energy and other commodity price increases dissipate further.” 

In a very good sign for the economy, productivity rebounded and annualized 3.1% in the third quarter after dropping 0.1% in the previous quarter. Also good from an inflation standpoint, unit labor costs fell an annualized 2.4% reversing a 2.8% increase in the second quarter. However, compensation growth rose only 0.6% compared to a 2.7% rise in Q2.

The ISM gave further support to the thesis of improvement in manufacturing. The ISM new orders index moved into positive territory to 52.4 in October after three months of contraction. Many elements of the report including employment and production were little changed. But particularly noteworthy was that prices paid were down 15 points to 41.0, the lowest reading in 2-1/2 years.

On a regional basis, the Chicago Fed reports healthy business activity as indicated by very strong rates of monthly expansion in purchasing rates of 58.4 (anything above 50 indicates expansion). Orders, the most important component, point to improving production and employment in the coming months as businesses expand.

Also on the positive side of growth was Construction Spending, inching forward at 0.2% in September following a 1.6% rise in August. Residential construction led the way and was followed by private non-residential construction. Public outlays declined 0.6% in September following a 3.5% jump the prior month.

Factory orders rose 0.3% in September on strength of petroleum and coal on the non-durable side, which are sensitive to price drops, and transportation on the durable side. The report also revealed a healthy increase for core capital goods, indicating that businesses continue to invest in their equipment, if not in their workforces.

Jobs are coming back, but painfully slowly. The government announced today that unemployment fell from 9.1% to 9.0% in September. The survey reported a 277,000 increase in household employment which has posted significant increases for three months in a row.

 At the margins, the economy is clawing its way back. But the modest gains noted this week regrettably do not portend an end to the malaise this great economy suffers.  Regardless of what the administration and the Federal Reserve say, there is no way this economy resumes its potential until debt and deficit spending are addressed both here and abroad. We must actually endure the painful consequences of the necessary remedies. There is NO magic medicine.

Erskin Bowles, co-leader of President Obama’s fiscal commission told the congressional supercommittee seeking a $1.5 trillion debt-reduction package, “I’m worried you’re going to fail.” The 12-member panel is just three weeks away from its deadline with no agreement in sight.

Former Senator Pete Domenici of New Mexico, a Republican, criticized Democrats who oppose changes to Medicare and Republicans who refuse to accept tax increases. “They are both complicit in letting America destroy itself, in letting this great democracy destroy itself because we don’t want to make tough decisions,” Domenici told the supercommittee. “I hope you heard that.”

Chuck Bently of Crown Financial Ministries notes that Veronique Riches-Flores of France’s largest bank, Societe Generale, recently entitled her analysis of the crisis, “We are all Greeks.” According to Bently, “she was bluntly pointing out that the member nations of the Organization for Economic Cooperation and Development (OECD) all have unsustainable levels of debt. Essentially she made the case that both the US and European nations are facing tough choices ahead and that she foresees the need for austerity plans in most of the Western world.”

The hour has come for Europe and this country, which is rushing headlong into the same mess, to deal with, not only our debt and deficit spending, but more importantly with the sick mentality of spending more than comes in. It is an attitude ingrained in our political system. The two political parties stand diametrically opposed on the issue of the role of government. Each year when they debate the so-called budget, they undertake an impossible mission; the reconciliation of small government and large government. When they fail as they inevitably always will, they simply spend what they must on each side to gain re-election and pass the certain spending excesses onto the next Congress and the resulting debt to the future generations.

We are all Greeks and our future is unfolding before our eyes in Europe. We were able as a country to save ourselves from the $5.00 fee that banks were going to charge customers for using their debit cards to spend their own money. Are we capable of electing political leaders who will take us off the road to Greece?

The Road to Greece

Global equity markets popped yesterday, intensifying their October rally to 15% for the MSCI US Broad Market Index and 21% for the FTSE All World Index (ex-US). The enthusiasm was sparked by two events that equity investors broadly took as good news. European Union leaders agreed on a deal to theoretically end the two-year financial crisis with Greece at its center. And in the US, Gross Domestic Product grew in the third quarter 2.5%, more than was expected and following a 1.3% rate in the second quarter. But while conditions may be improving ever so slightly, the disease remains without serious work for cure.

The road to recovery mapped by Europe’s finance ministers comes in overdue, over-budget and strewn with potholes. Instead of cutting straight through the obstacles of massive debt, they’ve snaked around it, taking the short view by employing excessive financial engineering and leverage. After criticizing US remedies these past two years, European leaders are doing the same and worse.

Similar to the 2008 crisis, Greece will undergo a controlled default whereby banks who own their debt agree to shoulder a 50% write-off of their value. This arrangement is designed to prevent the triggering and payment of credit default swaps on Greek debt. At least two groups of speculators are bailed out by the new road to recovery; credit default writers and banks owning Greek debt. Now European taxpayers will get a taste of what happens when the natural selection process of markets are interrupted by socialist bureaucrats. If that sounds a bit strong, hear the arrogance of Nicolas Sarkozy’s boast of a year ago. “By ensuring that capitalism and the market economy do not become caricatures of themselves, we will save the market economy and capitalism.”

Francesco Guerrera of the Wall Street Journal warns of the longer range issues. He says that by undermining the value of Greek credit default swaps CDSs, “European leaders have created a precedent that will weigh heavily on the market in future crises. While CDSs attract speculators, a lot of banks and fund managers buy them as protection against catastrophe. Paradoxically, the second key element of the Greek plan is a CDS-like instrument for Italian and Spanish debt.”

Yesterday, we got good news at home that the US economy grew more than expected in the third quarter. We also learned that the value of goods and services produced in this country surpassed the pre-recession highs. But it took 15 quarters to do so, which is three times longer than the average for the 10 previous recoveries since World War II according to the Wall Street Journal. Neal Soss, chief economist of Credit Suisse said “the American economy finally has accomplished the recovery and has now entered the expansion, but the growth is clearly too slow to solve the most significant problems the economy faces: jobs and getting the public budgets under control.”

Companies increased purchases of equipment and software. The consumer also stepped up purchases significantly. Unfortunately spending came from savings and perhaps new debt as consumers suffered the biggest drop in incomes they have seen in two years. Declining incomes combined with weak confidence and high unemployment bring into question the sustainability of their part in economic growth.

Consumer confidence reported this week is at its lowest point since December, while expectations are at their lowest point since the recession. The consumer confidence index fell 6.6 points in October to 39.8 with the current conditions component down a sharp seven points to 26.3 and the expectations component down 6.4 points to 48.7.

The declining value of homes has not been constructive for consumer confidence. The best hope is that the declines are slowing. Case-Shiller data released earlier in the week show no change in the adjusted composite-20 index for August. The unadjusted reading, at a very weak 0.2% compared to 0.9% and 1.1% in the two prior months, indicates prices are still declining somewhat because the monthly readings are three-month averages.

Because of lower prices, new home sales jumped 5.7% in September. The median price of $204,400 fell 3.1% in the month for the third time. The annualized rate of 10.4% is the steepest since the recession in early 2009. The average price of $243,900 is down 3.9%, also for the third month. Annualized contraction is 9.9% and is also the steepest since the recession. The South and the West accounted for the bulk of the sales.

Don’t look to the special congressional deficit-reduction committee for any near-term good news either, specifically in the area of revamping the massively complicated and growth-inhibiting US tax code. According to the WSJ, as the Thanksgiving deadline approaches, some lawmakers from both sides of the aisle have started to view tackling a full rewrite of the country's myriad tax laws as too challenging, especially coupled with the larger mandate of trimming at least $1.2 trillion from the federal budget deficit over 10 years.

On that front it appears the same tired divisions exist. According to the WSJ, Democrats offered a $3 trillion deficit-reduction proposal that included $1.3 trillion in increased taxes, which was dismissed by Republicans. The GOP's plan to cut about $2 trillion from the deficit over 10 years was rejected by Democrats because it raises far less in revenue, taxes and fees.

If these guys don’t credibly deal with the outrageously large US debt and US deficit, another downgrade of Treasuries is not only possible, but likely. There is no way to prepare for that likelihood, just as there was no way in August. There are no alternatives to US debt at the present time. Perhaps that fact is what perpetuates the arrogance and stubbornness in Washington. Unless we address the core problems in this country of debt and entitlement, we will become more like Greece with every passing year, and the developing world led by China will eventually become our reluctant and demanding rescuers. If there is still a silent majority, it’s time to wake up and elect leaders who have the guts, statesmanship and complete lack of political ambition to deliver the cure.