Monthly Archives: June 2012

Some Thoughts on Debt Saturation and Growth

We recently received multiple references to this chart:

This one from Joe Miller (attributed to a David P.) was accompanied by the statement:

Regardless of whether you call it debt saturation or diminishing return on new debt, the notion that taking on more debt will magically enable us to “grow our way out of debt” is not supported by data.

Although we intuitively believe the author is right, we do not think he has proven his point. We discuss the post and explore our thoughts on the topic.

Preparing for a Career As a CNN Announcer

The US Supreme Court gave their ruling on Obamacare today and essentially upheld the legislation. As Yahoo states in Supreme Court upholds Obamacare individual mandate as a tax, the Supreme Court upheld his signature health care law’s individual insurance mandate … as a tax. In particular, as justice Roberts writes, “the mandate is not a legal command to buy insurance. Rather, it makes going without insurance just another thing the government taxes, like buying gasoline or earning an income.

The importance of this interpretation is identified in a Zero Hedge post: U.S. SUPREME COURT UPHOLDS CORE OF OBAMA HEALTH CARE, that quotes the Wall St. Journal:

The court’s 59-page opinion rejects the government’s primary argument that Congress’s power to regulate interstate commerce gives lawmakers the authority to require citizens to buy insurance or pay a penalty.  But the court goes on to uphold the insurance mandate on other grounds.  “It is reasonable to construe what Congress has done as increasing taxes on those who have a certain amount of income, but choose to go without health insurance,” Chief Justice Roberts writes.  “Such legislation is within Congress’s power to tax.”

In other words, a core piece of the legislation, the individual mandate part, is lawful only if considered to be a tax.

Understanding Money: Part 5 – It’s All Money

This part has been under pen for more than a year. This has given us time to reflect on and clarify our thoughts on money. The result is unconventional but has brought clarity to many issues for us. These will be explored in later essays on the Fed and quantitative easing (QE).

Negative Feedback, the Tragedy of the Commons, and Complex Systems

We were reading John Hussman’s weekly essay The Reality of the Situation (John is one one of the real straight shooters. He is an economist but uses economic theory to make sense of what is going on, similar to Lacy Hunt who should also be at the top of your reading list), when we felt an irresistible urge to try and bring a number of things together. In the process, we hope to shine some light on an intuition that has bothered us for a while. Warning: this post may ramble but it will be rewarding – certainly for us.

Are Banks Afraid to Lend?

Unfinished manuscript.

Back in 2008-2009 in the depths of the financial crisis in the US, there was widespread assertion that the large buildup in excess reserves at the Fed was the result of banks’ fear of lending their capital. Certainly this was the case for the inter-bank market. No bank knew how badly impaired another bank’s balance sheet was. Their only information was on how badly their own balance sheet was impaired and a suspicion that their neighbour would likely not be in better shape.

Reality Check: 20120626

Here is Gary’s article,  In Praise of Bush’s Tax Cuts. For more by Gary, visit his website at http://www.garynorth.com/.

We have not reviewed this essay but leave it for the interested reader. Should the tax cuts be allowed to expire, the increased revenue will initially benefit the deficit but at the same time, by reducing disposable income, will reduce consumer spending, possibly producing a recession if the US is not in one by then. Like Europe, the US cannot avoid pain in its future, it can only choose the flavour and degree of pain. Even the choices available narrow as time progresses.

Don Coxe Conerence Call: 20120622

Don Coxe is a historian and an institutional investment advisor whose specialty is the commodity space. We have followed Don Coxe’s conference calls for years when we could access them. Generally made on Fridays, they are for clients of the BMO Financial Group and as such are restricted in their availability. His website is sparse and functionally wonky.

Starting with this post, we hope to be able to make his webcasts more available. Here is the link.

Stratfor Geopolitical Weekly: 20120626

With the Middle east remaining the geopolitical hotspot and the current action centered on Syria, we offer what we feel are a few key points from an important essay:

  • Therefore, the Russians have an interest in encouraging any process that continues to draw the United States into the Islamic world. … Syria is not a side issue but a significant part of its strategy.
  • During the 2000s, Israel and the West believed the main threat emanated from the Sunni world. Al Qaeda, the Muslim Brotherhood and Hamas were all Sunni. …there appeared to be more risk on the Sunni side than on the Shiite side.
  • Israel now desires a Sunni regime in Syria that would block Iranian ambitions.
  • Syria is a demonstration of the limits of Israeli power. What happens in Syria matters a great deal, but Israel lacks the power and influence to have an impact.

Putin’s Visit and Israeli-Russian Relations

June 26, 2012 | 0900 GMT

Stratfor

By George Friedman

Russian President Vladimir Putin arrived in Israel on June 25 for his first state visit since retaking the presidency. The visit was arranged in mid-May, and so at least part of the agenda was set, given events in Syria and Egypt. The interesting thing about Israel and Russia is that while they seem to be operating in the same areas of interest and their agendas seem disconnected, their interests are not always opposed. It is easy to identify places they both care about but more difficult to identify ways in which they connect. It is therefore difficult to identify the significance of the visit beyond that it happened.

Small Potatoes Can Still Cause Indigestion

Two articles today prompted this short comment. The first is courtesy Stratfor Global Intelligence:

Fitch Ratings on June 25 downgraded Cyprus’ sovereign bonds from BBB- to BB+, citing the need for up to 6 billion euros ($7.5 billion) in aid for Cypriot banks exposed to Greek debt, Cyprus News Report reported. The government will need 1.8 billion euros — 10 percent of Cyprus’ gross domestic product (GDP) — to save Laiki Bank. Fitch forecasts that the Cypriot deficit will measure 3.9 percent of GDP, missing its 3 percent target.

The second comes from MarketWatch: Cyprus becomes fifth euro-zone country to seek a bailout: report. Cyprus is looking to get money to bail out its banks that have been impaired by their exposure to Greek debt.

The Cyprian economy is ‘small potatoes’ when compared to the entire EU, but its request for funds comes when there are many other requests or anticipations and funds are at a premium. Perhaps larger is the fact that the number of nations requiring help just increased by 25%. The psychological impact may be greater than the financial one.

Things That Make You Go Hmmm…: 20120625

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Grant with his usual delightful foray into some oblique historical  vignette, this time on the topic of “The Emperor’s new Clothes”. He makes the connection with current events as:

From that simple beginning, the story goes on to demonstrate how definitive pronunciations from those in a position of power can prevent the masses from understanding what is staring them in the face but that it only takes one person either clever enough, brave enough or, in this case, naïve enough to speak out to suddenly bring realization crashing down upon the rest of the hordes and thus create carnage.

He then list some of the early “naysayers” that warned of the pending housing bust and the financial crisis. Then, he reviews the lying, denial, and obfuscation employed by officials in Greece and the EU over a period of years to try and hide Greece’s financial mess. But now we have Spain and he shows how the time-frame for a crisis has been greatly compressed. Finally, he brings it into the present tense. The emperors of politics and finance are still madly spinning new robes, but the products are becoming increasingly ephemeral. A good read.

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