Friday, November 9, 2012

Avoiding The Fiscal Cliff = QE To Infinity

There is no reason to expect that renewed efforts at federal budget deficit reduction will result in anything more than the usual smoke and mirrors, further increasing, not reducing, long-term U.S. sovereign-solvency risk.  In reality, the U.S. economy has not recovered, and no recovery is pending.  Consumer liquidity remains severely impaired, and broad business activity continues to falter anew.  As a result. the actual federal budget deficit going forward will be much worse than the relatively rosy numbers being used as the basis for government negotiations - John Williams,
Everyone can draw their own conclusions about how this so-called "fiscal cliff" situation will play out, but the only way it can possibly be "resolved" is by postponing the inevitable.  As Williams states:   "Accordingly, global market reaction—to a severely deteriorating outlook for U.S. fiscal conditions—increasingly should reflect massive flight from the U.S. dollar and movement into gold and the stronger Western currencies."

The big news yesterday was the fact that a couple of "official" - supposedly professional - organizations issued a statement proclaiming that if the U.S. goes off the fiscal cliff that it would lead to a recession.  This revelation would be funny if it weren't so completely pathetic. Talk about understating the obvious.  Notwithstanding the fact that on a real inflation basis, not Govt CPI basis, our economy has remained in contraction since at least 2008, if Congress and the President were to allow the "fiscal cliff" mechanism to occur, it would throw our system into economic armegeddon.  I went over the numbers earlier this week as to why this would be the case.

The truth is that not only will the fiscal cliff scenario be kicked down the road like the proverbial "can" (anyone know if that's supposed to be a beer can or a soda can?  Maybe a can of beans?), but the increasing chasm between expenses and revenues will have to be filled with even more Treasury debt issuance.  Tautologically, this means more QE.  More QE means even higher prices for gold and silver.  The reason more QE will be needed is the same reason the Fed has continued and expanded QE since its inception in 2008:  1) the banks need liquidity or they will collapse; 2) the Treasury needs a new source of cash or interest rates will go to the moon.

To address the Treasury funding requirements, I've got a graph from Zerohedge which shows the steady decline in foreign Treasury purchases since 2009:

(click on chart to enlarge)

Foreign funding of Treasury paper has declined by 55% since 2009.  I have not seen this fact reported anywhere in the mainstream media.  It should come as no shock, however, as foreign investors are not idiots.  They know that money printing devalues the dollar, so they want less of it.  China has somewhat maintained its level of Treasury buying lately, but that's because if they are perceived as fleeing the dollar, the dollar would collapse and China would be, in a sense, shooting itself in the head financially.   That will change eventually.

The decline in foreign participation in Treasury auctions has been replaced by the Fed's participation, aka QE.  The next chart, which I hypothecated from, shows this fact nicely:

(click on chart to enlarge)
This is an interesting chart.  Not only does it show graphically the fact that the Fed is increasing the size of its balance sheet by buying Treasuries in order to make up for the loss in foreign participation, but it shows the concomitant correlation of the price of gold.  The orange line shows the projected growth in the Fed's balance sheet if it just maintains the existing QE policy.  The red line shows the trajectory of the Fed's balance sheet if it implements the highly telegraphed next phase of QE.  Everyone can draw their own conclusion as to the expected trajectory for the price of gold under the "red line" scenario.

And the truth is, the red line scenario is the expected policy move given what is already written on the chalkboard in terms of the giant locker room on Capitol Hill.  What about when the impending debt ceiling increase has to be increased again by next summer?  See where this is headed?  QE to infinity.

The metals/miners market seems to have reverted from "sell the rallies" to "buy the dips."  What's even more interesting, the metals have had more days recently in which they go higher when the S&P 500 is getting hit.  I think the hedge fund margin calls related to the mini-crash in AAPL have run their course, so I think the SPX will get a trading bounce here and the metals will move with it.  As the media hype and political show connected to "The Cliff" intensify, the stock market has a lot of downside risk and I fully expect a portion of the money that leaves stocks will flow into the metals.

As for the NFL, the season is maturing and the favorites are starting to distance themselves from the rest of the field.  Up until now, the point spread underdogs have been outperforming the favorites.  I think this weekend and forward will see the point spread favorites starting to cover a lot more frequently.  The most interesting game is the Houston/Bears game.  This is must-watch TV.  I like the Texans to prevail.  Of the mediocre teams, the Tampa Bay/San Diego game will be interesting to watch.  And, of course, I like the Broncos to easily cover the 4 1/2 point spread over Carolina.  Have a great weekend.


  1. you are just saying you like the Texans to drive me crazy. Prediction: Cutler has 2 TD passes (after TX turnovers in red zone) and gets sacked 9 times. Bear defense once again wins it for the team. Cutler only walks away from Offensive coach twice.

    on the other hand...

    as to fiscal cliff--its unimportant to them except for political theatre-and nothing will happen until they run their 2 minute drill.

  2. It's a soup can.

    Carolina owes their start to the replacement refs. They stink. And remember, Joe Flacco told the press he was the best QB in the NFL. I vehemently disagree. I'll be at he game Sunday in Purple Dreds and holding the sign that says Flacco sucks. I think you should publish NFL posts on Fridays and possibly open a Saturday forum.

    Your readers (being gold proponents) probably are a tad briter than the average NFL fan.

  3. P-l-e-a-s-e let the good professor explain
    ...since I know that it is a complex, difficult and often misunderstood term.
    After all. it's things like this that keep Economics Professors like me in business, no?
    Well, basically ,there are two parts to this beautiful , time-tested theory.
    The FIRST part is the "Trick" part.
    You MUST emphasize and realize and understand that this is ALL a trick.
    The SECOND part, dear students of the world, is the crucial "Trickle-DOWN" part.
    That, my friend, simply means that the super rich urinate all over the rest of us
    ...and then laugh all the way to their off-shore banks and tax-shelters.
    I hope that I have been helpful. Until next time
    - Professor America

  4. Please forward to PIIGS...


    Now OWS is launching the ROLLING JUBILEE, a program that has been in development for months. OWS is going to start buying distressed debt (medical bills, student loans, etc.) in order to forgive it. As a test run, we spent $500, which bought $14,000 of distressed debt. We then ERASED THAT DEBT. (If you’re a debt broker, once you own someone’s debt you can do whatever you want with it — traditionally, you hound debtors to their grave trying to collect. We’re playing a different game. A MORE AWESOME GAME.)

  5. What in the world is going on with aumn??? The current market cap is 147mm. Wtf! So your telling me with 30mm in cash on the balance sheet and 0 debt all the properties this company owns is worth only a little over 100mm???? The stock is trading as if its going bankrupt.

  6. $54 million cash on the balance sheet.

  7. Go Texans! I'll be watching all the way to the Superbowl hopefully, if we don't fall apart like last year with injuries. Choke city (Houston) is desperate for a champion (which got one time with the Rockets in the mid-1990's when Jordan was "retired").


  8. Obama Wins for whom?

    Obama’s two presidential victories represent an object lesson about how the 1% managed to avoid rescuing the economy – and especially his own constituency – from today’s rush of wealth to the top. Future political annalists will see this delivery of his voters to his Wall Street campaign contributors control as his historical role. In the face of overwhelming voter opposition to the Bush-Cheney policies, the President has averted popular demands to save the economy from the 1%. Instead of sponsoring the hope and change he promised by confronting Wall Street, the pharmaceutical and health care monopolies, the military-industrial complex and big oil and gas, he has appeased them as if There is No Alternative.

    If the Republican accusations are correct in accusing President Obama of steering America along the “European” course, it is not really socialism. It is neoliberal financial austerity, Greek style. His task over the next two months is to avoid using deficit spending to revive the economy.

    The neoliberals whom he appointed as a majority on the Simpson-Bowles Commission already have inflated their trial balloon claiming that the government must balance the budget by slashing Social Security, Medicare and Medicaid, not by restoring progressive taxation. My UMKC colleague Bill Black calls this the Great Betrayal. “Only a Democrat can make it politically safe for Republicans who hate the safety net to unravel it” he notes.[1] <#_ftn1>

    Having appointed the Bowles-Simpson commission members who seek to shift the tax burden off business onto consumers, the President will pave the way for Bush-type privatization. In his first debate with Mitt Romney, Mr. Obama assured his audience that they were in agreement on the need to balance the budget (his euphemism for scaling back Social Security, Medicare and Medicaid). By christening this “the Great Bargain,” President Obama has refined Orwellian doublethink. It is as if George Orwell went to work on Madison Avenue.

    Having been elected with an enormous voter mandate, Mr. Obama could have reversed the sharp polarization between creditors who were pushing the 99%, industry and real estate, cities and states deeper into financial distress. Instead, his policies have enabled the 1% to monopolize 93% of America’s income gains since the 2008 financial crisis.

    At a potential turning point in the direction the American economy was taking, rescue and change were averted. We have seen what will stand as a classic example of cynical Orwellian doublethink. Promising hope and change four years ago, President Obama’s role was to hold back the tide and divert voter pressure for change. He rescued the financial sector and the 1%, and sponsored the Republican privatization of health care instead of the public option, and to take $13 trillion onto the government balance sheet in the form of junk mortgages, largely fraudulent loans held by Fannie Mae and Freddie Mac ($5.2 trillion alone) and other casino capitalist gambles gone bad. Mr. Obama was Wall Street’s white knight.

    Big fish eat little fish, and the 1% are devouring the 99%. Those who describe how this is happening are accused of class war.

  9. Man Set on Fire in Argentina Over Debt

    Police sources cited by the official Telam news agency said that the situation developed when the victim came to a building to collect a debt from another man and the pair began arguing in the vestibule.

    The debtor apparently thoroughly doused the collector with a flammable liquid, set him on fire, and then let the victim burn, closing the front door before fleeing on foot, but a group of local residents caught him and called the police.

    Read more:

    1. Too bad, he should have wait what fiscal cliff has to offer. But the term itself connotes danger right? fiscal slope is more acceptable. I am not as expert as Ed Butowsky but the bill just cast shadows.

  10. The Bank of England has just crossed the line into straight government financing

    So now we know why the Bank of England's Monetary Policy Committee called a halt to more Quantitative Easing this week – it's because the Chancellor and the Governor of the Bank of England have concocted a backdoor way of doing the same thing.

    The latest little (actually quite big at a tidy £35bn) money printing wheeze comes about as close to outright monetising of government spending as it is possible for the Bank of England to go without simply creating the money and handing it by the lorry load to the Treasury, a la Weimar.

    What the Treasury has decided to do is take the accumulated interest payments on the stock of government debt the Bank of England has bought under quantitative easing, and credit it to the Government's books rather than the Bank of England's. The total is £35bn, of which the government intends to take £11bn this financial year and £24bn nex

    The Government excuses its actions by saying that it is only bringing itself into line with practice in Japan and the US, the other major economies to be practicing substantial QE right now. It might also be argued that to the extent the European Central Bank indulges in bond purchases, it practices something quite similar too.

    In any case, you might reasonably think that it doesn't really matter how the government accounts for the interest on the Bank's stock of gilts. Since the Bank of England is 100pc owned by the Treasury, the government has in essence only been paying interest to itself, so why not just stop the charade and save the money?

    Wrong, wrong, wrong. The justification for keeping the interest is that it creates a buffer to fund expected losses on the gilts when the Bank of England comes to unwind its quantitative easing programme. These losses are now going to have to be met by the government directly at some stage in the future. Alternatively, the government could simply ignore them or write-them off. The Government is transferring the losses from today until tomorrow. The thin line which separates monetary from fiscal policy is being crossed in a way which substantially undermines the Bank of England's claim to independence.

  11. Eric Sprott's presentation on market manipulation at Manhattan Investors conference

  12. THE $36 Trillion DTCC FRAUD: It’s Owned By The Banks! — Rob Kirby

    CME Lawsuit Over CFTC’s Swap-Database Rule Faulted by DTCC

    Dodd-Frank, the 2010 financial-regulation overhaul, directed the CFTC and Securities and Exchange Commission to write rules for swap-data repositories to give regulators a better view on prices and volume in a $648 trillion market dominated by banks including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Deutsche Bank AG. (DBK)

    Fragmented information about the market across multiple data repositories risks undermining Dodd-Frank’s goals by threatening regulators’ ability to view consolidated positions and patterns of manipulative or abusive trading, according to DTCC.

    “It is critical that swap data is reported to and maintained by one SDR throughout the life of the contract,” Thompson said.

  13. Dave you just might be better at picking NFL outcomes than moves in the metals/miners markets.. haha
    Drew in Lakewood