August 20, 2009

The street smart guys who know all the angles

While the argument rages on in Congress and on cable TV about healthcare reform, Chairman of the Fed, Ben Bernanke, as usual finds another mini-cassette player in the bottom of his big bowl of Caesar salad in the executive lunch room of the New York Fed. He cues it up: "Your mission, should you choose to accept it, is to raise 1/2 trillion dollars over the next two months at Treasury auctions while paying absurdly low interest rates. If you fail, we will disavow all knowledge of this communication. This cassette will crumble into croutons in one minute."

Essentially, that's what the Fed/Treasury has done during July and August - auctioned off close to $500 billion in T-bonds and bills in an effort to keep pace with the exploding deficit. Not so long ago, $500 billion in deficits would have been a particularly bad year, let alone two months. But that was then; this is now.

Who is buying all this stuff? This is a subject of great speculation, particularly among the mordantly funny commenters on, "the street smart guys who know all the angles" (Woody Allen, in his voice-over intro to "Manhattan.") The Fed does things like auction off 5-year bonds to participating banks (required by law to bid at auctions, part of their Federal Reserve charter), and then, when a decent interval has passed (say a week or so), turns around and repurchases the bonds from the bidders. Takes them off their hands, you might say. The ruse is necessary because the Fed is prevented by law from bidding directly at an auction of U.S. debt, presumably because it's too obvious a case of the snake eating its own tail. Are the Chinese, Japanese and petro-states still buying Treasuries? Well, that's hard to tell, frankly. The Fed is playing so many games of indirection that it's hard to find directions out (that's for the Shakespeare fans among you).

The purchase by the Treasury's own bank (the Fed) of the Treasury's promissory notes is all part of the "quantitative easing" (QE) instituted by Bernanke to help deal with this unprecedented "liquidity" crisis. It's another way of saying the Fed is conjuring money out of thin air in such a complicated, follow-the-bouncing-ball way that it doesn't quite look like that's what it is. But that is, of course, what it is. It's simply getting harder to convince all those foreign central banks, systematically defrauded and stiffed by government-sponsored entities (such as Fannie & Freddie) to keep pouring money into the gaping maw of the U.S. Treasury with so little in the way of return. And yet the Treasury's need for money has never been more desperate.

Bernanke has announced that QE will end next month, a decision made more no-brainerish, he says, because the economy increasingly looks robust, especially housing. No doubt you've noticed the same thing - the accelerating rate of foreclosures, the decline in real wages, the multi-hundred K layoffs every month, the coming tsumani of commercial real estate defaults caused by the winking-out of the consumer economy - none of this should obscure your clear view of how good things really are. So, having bought about $300 billion in Treasuries on the "secondary" market, the Fed will pack it in.

That should be interesting indeed. Then what will support the Treasury auctions? The merits of buying practically zero-interest paper from a seriously over-extended country (us)? Don't worry, that was covered in another cassette, this time in the bottom of a Cobb salad at the Four Seasons. The SSGWKATA (see title of blog post) figure it this way: the Fed, the Treasury, Goldman Sachs, JP Morgan Chase and the rest of the power players have been melting the stock market up through S&P index futures, using all the taxpayer "money" the system has been flooded with. This is why the Obama Administration allows the banksters to run wild with bonuses and deregulated horseshit: they're all acting as government agents. It's like combat pay. The Dow and S&P, for example, make no sense in terms of pricing if analyzed by P/E ratios, which are on the order of 23:1, and the volume on the exchanges has been consistently low. When QE ends (next month?), the markets will be allowed to melt down, causing a panic, a 10% "correction" (say, a thousand points on the Dow, one hundred on the S&P), and a "flight to safety," in the form of Treasury purchases, will ensue, as a grateful horde of suckers rushes headlong into the trap laid by their government and their Big Boyz co-conspirators.

Is that not beautiful? Does it make you wonder about the fairness of calling the government "incompetent?" It makes me proud to be an American, in a sick, very twisted way. If the SausaugeWhaKatars (see title again) are right, you can short now and clean up, just like Goldman and Shittygroup.

All investment advice herein is speculative in nature. Past conspiracies are no guarantee of future criminality. Consult your own con man and invest at your own risk. I can neither confirm nor deny that I wrote this. In 60 seconds, this post will fry the zero sector of your hard drive. You've been warned.

August 18, 2009

Probably the real reason health care cannot be reformed

It's only my theory, but then again, the whole blog's only my theory. When did that ever stop me before?

I cannot quite understand Barack Obama's apparent kowtowing to Big Pharma (whose lobbying group is practically named Big Pharma) or to the health insurance industry, or his mystifying inconsistency on whether he will or will not insist on a public option as part of the medical insurance scheme. I simply find it hard to believe that he's that cynical. My guess is that he's actually a Single Payer advocate who, in better times, would support a Medicare-for-All Program, or an expansion of the VA hospital system to cover everyone including non-veterans, or some form of socialized medicine.

But these aren't better times. It is perhaps a measure of the spoiled and self-indulgent nature of the American populace, and its tendency toward fatuous and irresponsible political discourse, that a graph such as that above from the St. Louis Fed is never introduced into the dialogue. The fact of the matter is that unless all of federal expenditures undergo a massive and fundamental restructuring, there really isn't money for anything new, and barely enough to do that which we have always done. That is the point that is never discussed. And while it may be true that over time a basic change in the delivery of health care to the American populace (freeing it at last from the ruinous costs of monthly premiums and high deductibles) would substantially improve the economy and federal finances, the problem right now is that the United States simply cannot undertake any heavy expenditures on a massive new social program. In a way, it's nearly insane to talk as if we can.

I think Barack Obama is aware of this fundamental lunacy. It has trapped his presidency. He came into office with health care reform a cornerstone of his Change Program, and then he got The Word. I think this happens to all Presidents-Elect in recent times. A story is told of an ashen-faced Bill Clinton, who met with the outgoing Treasury Secretary and the Chairman of the Fed before Clinton took the oath in 1993, staggering back to Hillary with the news that the federal government could afford "nothing, not even lunch." Those times were flush compared to these. The three lines of the graph above tell the story in chilling detail. Tax receipts (blue) are falling below $2 trillion; the budget (green), including the massive stimulus and such crazy expense items as "nation building" in Iraq & Afghanistan, has shot above $3.5 trillion; and the resulting deficit (red) is pushing $2 trillion. The lines are interrelated, of course, and are all going in exactly the wrong direction.

And against this backdrop we want to introduce a huge social program? I would find the "progressive" position, such as that promoted by Nancy Pelosi, more credible if she combined her advocacy with a demand that the defense budget be cut in half, effective now, and that all but the most essential overseas bases be closed. And went further and announced that the House would approve absolutely no more "supplementals" for Iraq & Afghanistan, with all the troops stranded there brought home as soon as possible. Yet one never hears that kind of logic and common sense, because such a position is not "centrist" enough, not militaristic enough, for Democrats who are always afraid of being labeled soft on....something. Take your pick of bad guys -- Commies, terrorists, narco-dealers.

We will be fortunate at the rate we're going to avoid a Black Swan event with the dollar's value, or a default on national debt obligations. Ben Bernanke has been given the task of raising money in a situation that requires the combined skills of Bret Maverick and the magician David Copperfield. Although Gentle Ben is daily vilified, his conjuring tricks are about the only thing between us and Going All Iceland.

So Obama is involved in his own Cash for Clunkers program. He can't deliver that 700 series BMW we all thought we were going to get. Instead, it looks more like a 1985 Chevy with scaly paint and a smoking exhaust, but honest (he's saying at these town halls), it's really just the same, it's a car. You'll get used to the vinyl, trust me. And most important, it's kind of what we can afford right now.

So he's asking the private sector to help him out, because the federal government just can't do it. It's that simple. He could simply tell us that, and then introduce the subject of where we DO spend most of our money, but I don't suppose that's going to happen either. Not Audacious and Hopeful enough. Honest, maybe, but you know how honesty sells in this country.