Tuesday, March 30, 2010

Slow but classic recovery

The economy seems to be recovering, only very slowly. Amazing that the indicators are following classic business cycle patterns.

The stock market is going up (it usually leads the economy), probably because investors are jumping into stocks and out of bonds because bonds are going down. As governments try to sell more bonds, the bond buyers are demanding a lower price and higher interest rates due to worries about the coming inflation and ability of the governments to repay. This will push up the mortgage rate too, and put more pressure on house prices. High interest rates also push down stock prices, eventually. Right now the downward pressure on stock prices has not yet materialized but many seem to think the year-long rally may fizzle soon.

All of this everybody knows. The government cannot continue to borrow and spend. Eventually the bills will come due. The longer they wait to cut, the worse the cuts will have to be. What USA needs is a big tax cut and an even bigger spending cut along the lines advocated by Ron Paul. Government wastes too much.

Now the feds are taking over student loans and will forgive the loans after 20 years if they cannot repay them by then with repayments limited to 10% of income above a base allowance. (Forgiven after 10 years if they teach or nurse). So students can take mickey mouse classes, not learn anything, not be able to function on the job, and not be able to repay and just get the loans forgiven after 10 or 20 years. A waste of money and an insult to education.

Wednesday, March 24, 2010

PIGS and Low USA Interest Rates

" We will just have to see how this plays out. Somewhere along the line the deficit spending is going show up with huge accumulations to the debt. "

Yes, debts will pile up and can pile up for quite a while before it gets corrected. Either the debt has to decrease, stay the same, or eventually bankruptcy, hyper-inflation or some other catastrophe happens.

" The subsequent rise in interest rates has not happened yet because there are takers out there for government bonds."

Yes, the Chinese have to buy bonds because they are running a huge trade surplus and are awash with dollars. Also many other countries have trade surpluses with the USA. Either the currencies have to adjust or Americans stop buying or Chinese start buying US goods -- as long as there is a trade imbalance there will be buyers for USA bonds.

" Somewhere these interest rates are going to have to go up. So far nothing on the horizon to show this but the cracks will begin to show up in the long term bond market when price falls. Right now there is a surge of funds from European banks bailing out of the Euro and buying dollars. When this subsides we should note some change."

I think this is a major factor recently. Europe has big problems with the PIGS -- Portugal, Ireland, Greece, Spain who have too much debt for their weak economies. California is better than Greece. USA states are in trouble but not as bad as the PIGS. Europe is investing more in USA bonds as a flight to safety until they can straighten out their own problems.

This inflow of foreign investment will give Obama money to dig a deeper hole. It may get so deep that the USA cannot climb back out of and we join the PIGS which are facing draconian austerity measures such as termination of Social Security, Medicare, Medicaid, Schools....

(Some are talking about retiring in Ecuador, Costa Rica or Panama which are supposedly cheap and safe like USA in the 1950s. With USA crashing, why not live on the beach?)

Tuesday, March 23, 2010

Health Care Bill

My problem with the health care bill is that it is so complicated that nobody knows what is going to happen, including those who wrote the bill. It may backfire. Our recent crash was triggered by failures in policies to promote home ownership via the community redevelopment act Barney Frank. It handed rich people billions of dollars in bonuses and threw poor people out of their houses onto the street.

" Yes, it is all over but the shouting! I agree with you and looking for a good Tea Party candidate is first priority. I hesitate with Ron Paul because of his stand to get rid of the Fed, yet his other policies make sense, especially debt reduction."

Yes, he recommends termination of many liberal spending projects -- this will obviously save money and reduce the debt without raising taxes.

"It may take a move to default on some part of the debt to recover what is going to happen with this new Health Care Bill. My feelings are that the Congressional Budget Committee lied about cost reduction on the bill and were bought off. Watch out for new taxes, and an increase in unemployment.

Yes, there will be new spending that will be financed one way or another. The bill is probably too complicated for the CBO to figure out and they can manipulate the figures easily. Increased uncertainty will scare business from hiring to tax receipts will be under pressure. They will have to tax, inflate, or default.

Obama continues to spending on 2 wars plus adding more spending on health care and other socialist experiments will eventually bankrupt USA. Another problem with this new bill is that like many other such bills, the spending is happening sooner and the purported savings, revenues, and tax inflows will happen later so politicians can will continue to run up debt and hide the problems, poor performance and low revenues for decades. The recent crash was an accident -- they should have been able to put off the day of reckoning until 2020 or later.

The new health care bill or or an Iran war may be the straw that breaks the camel's back. Eventually debt financing money will hit the limit as to what creditors will put up with (as in California). The the feds can hyper-inflate and cause a Facist takeover or they cut so much spending so much as to cause a Communist revolution. Either way democracy is dead!