 | | The Daily Reckoning | Friday, July 22, 2011 |
- The curious and special case of Argentina's economic woes...
- How close are we to Armageddon, really?
- Plus, Bill Bonner on discredited theories, dented fenders, empty houses and plenty more...
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|  | | | | A Fine How-Do-You-Do | | Argentine Companies Face Stiff Penalties for Calling Out Skeptical Stats | | |  | | Joel Bowman | Reporting from Buenos Aires, Argentina...
The sun is out today, and so too are the trendy and beautiful people who seem always to follow it. Your editor – ill-suited to either of the above adjectives – is also enjoying the change of weather. It's too nice to be sitting in the office. So we brought our laptop to a nearby restaurant to work. The sidewalk cafés here in Palermo are full of fashionable young men and the pretty women they are trying to impress. Waiters move from table to table, taking orders and filling wine glasses. Music can be heard off in the distance. We close our eyes...it could almost be spring.
Meanwhile, behind the afternoon's rosy hue, politicians are doing their best to conjure rainclouds. A recent article in The Wall Street Journal tells the tale...
"Argentina's government has filed criminal charges against the managers of an economic consulting firm," the paper reads, "escalating its persecution of independent economists."
Apparently a local firm, MyS Consultores, published an inflation figure that was not to the administration's liking...which is to say, a figure probably much nearer to the truth than the "official" reading. The government's own figure is 9.7%, even though you'd be hard pressed to find anybody who thinks it's less than double that. Most economists reckon it's north of 20%. Some say much higher, a notion the government seems to tacitly confirm every time it supports trade unions' collective-bargaining agreements that include annual wage increases of between 20-30%. Curious, no?
In any case, investors and economists alike have been increasingly skeptical of the government's published stats since the former and late president, Nestor Kirchner, began replacing longtime civil servants with political appointees back in early 2007. The Commerce Secretariat – who still heads what Orwell might call the nation's "Ministry of Information," Indec – was a close political ally of Kirchner's. Curiouser and curiouser, indeed...
Continues the Journal:
"So far this year, the Secretariat has fined at least nine economic research firms 500,000 pesos ($122,000) each. This week, the Secretariat also slapped a second fine on Orlando J Ferreres & Asociados."
"'They fine us for saying how much prices have risen,' Mr. Ferreres, director of his eponymous firm, said. 'They could seek criminal charges against all of us. We don't know how far they're willing to go.'"
It's no secret that governments abhor competition. They are, by definition, coercive monopolies. Whether it's debasing a mandatory currency, stealing from the people it affects to serve or fiddling with the "official" stats, governments seek the unfair advantage that only force can secure.
Still, this is just the kind of caper you'd expect in a country like Argentina, itself no stranger to inflationary currency crises, as Eric pointed our earlier in the week.
"In 1969," observed Eric, "the Argentine government trimmed two zeros off the existing Peso Moneda Nacional to create the new Peso Ley. In 1985, the government slashed four zeros off the Peso Ley to create the Peso. Then in 1992, the government cut three zeros off the Peso to create the Austral, simultaneously linking it to the US dollar, one-for-one. Ten years later, this peg to the dollar ruptured and the Argentine currency swiftly lost 75% of its purchasing power...again."
Indeed, when it comes to squandering resources and enacting foolish economic policies, few countries can compete with Argentina's prowess. From ousted presidents, military dictatorships, socialistas, Peronistas and now Kirchnisters, the poor people of this land have just about seen it all. It takes a lot to surprise an old Porteño.
A friend here recently put the situation to us thus: "There are four types of countries in the world, Joel. You have the 'first world' countries and the 'third world' countries. Then you have Japan, a special case. Nobody can quite figure out how those people made so very much from so very little...and then you have Argentina, another special case, where exactly the opposite is true."
Alas, Argentina's government is no lone thief in the night. Governments around the globe, in all "four" types of nations, are tipping the national accounting abacuses in their favor, duping voters and taxpayers all the while.
Bill has more on the approaching Armageddon facing the world's "strongest economies" in today's column, below...
| | | |
Judgment, pestilence and bloodshed – are they headed for the USA?
An extremely controversial "R-rated" documentary seeks to answer these urgent, historic questions.
Don't wait – watch it now.
| | |
| | The Daily Reckoning Presents | | 100 Basis Points to Armageddon | | |  | | Bill Bonner | Is there a fender anywhere in Christendom that the financial authorities have not dented yet?
They are lost without a compass. They are up the river without a paddle. At the automatic teller without a pin number. They have no theory that has not been discredited. They have no experience which does not contradict them.
In 2006, they couldn't see the crisis coming. In 2008, they couldn't understand it. In 2009-2011, they couldn't fix it. Their theory told them they couldn't spot a bubble; it was obvious to just about everyone else. Even here on the back page, we warned readers. Then, the financial elite mistook the problem for a lack of ready cash. Practically every American household knew what the real problem was: too much debt. And then, while everyone else knows you can't fix a problem of too much debt by adding more debt, the authorities missed the point entirely. Since they began applying their fixes, the national debt of Italy grew $360 billion. Japan's national debt rose $1.1 trillion. And the US added more than $2 trillion. They may have successfully 'kicked the can down the road'; but now it is a bigger can. Last week, they tripped on it again.
In these, the world's 3 leading debtors alone, the problem is now $3.5 trillion worse. And that is just a piece of it. These figures do not count the trillions' worth of other monetary and fiscal duct tape the feds have run through. Congressman Ron Paul put the figure for the US alone at $5 trillion and asked Mr. Bernanke about it.
What do you think you got for all that money, he wanted to know? The Fed chief remained true to his delusions. The money wasn't spent, he protested; it had been 'invested.'
Then, what was the return on investment? By every measure, the US economy is worse off than it was before the fixes began. After $7 trillion in losses, housing is still falling. The jobs picture is even worse. The broad "U6" unemployment rate – which includes those who have stopped looking for a job, part-time workers who can't get full-time jobs, etc. – increased from 15.8% to 16.2% in June. The number of Americans with jobs fell by a quarter million to 153.4 million. And the time it takes to find a new job now exceeds the time in which the jobseeker typically stops looking – a record of 39.8 weeks. Hourly wages dropped. Hours worked fell too. And the portion of the population that is employed hit a new low of 58.2%.
While the proximate problem in America is at the household level, in Europe, it is in the banks, bailouts and boondoggles. Moody's, the giant rating company, tossed Irish debt into the junk yard last Wednesday, after already having knocked down Portuguese debt the week before. Greek debt has had junk status for months; but Fitch downgraded it anyway; last week 10-year Greek notes were selling at a 48% discount. Two year debt yielded 36% when we checked on Tuesday. Moody's said it was looking at US debt too; a downgrade is coming sooner or later.
The bigger the pile of debt gets, the more it stinks. Last week, investors began to notice a bad smell coming from Italy, the world's third largest debtor. The world's other two leading debtors – the US and Japan – have $26 trillion of sovereign debt between them. Add Italy and the total is nearly half the world's GDP. These are big numbers; they're not going away.
There is nothing especially deadbeat about Italy. At 120% of GDP its government debt is, officially, between that of the US and Japan. Unofficially, it is about even with the US. As for deficits, Italy is a model of integrity. Its deficit is only 4.5% of GDP, compared to America's 11%.
On these numbers you'd think that the cost of borrowing for one of these deadbeats should be about the same as for another. But recently investors decided that Italian debt could be as fatal as Spanish cucumbers. They sold it. Doing so, they sent yields on 10- year Italian bonds over 6%. Spain pierced the 6% level soon after. Since 7% is viewed as the upward practical limit – this brought all of Europe to only 100 basis points from Armageddon.
The authorities looked on like housecats watching the evening financial news. They saw the images. They heard the words. They had no idea. In Europe, they rushed to put together another bailout.
In America, meanwhile, the day of reckoning approaches too. In two weeks, unless the statutory limit is raised, America will cease making debt payments. It will be "worse than the Lehman bankruptcy," says former US Treasury Secretary Larry Summers. Armageddon, in other words. But in light of what their fixes have wrought so far, Armageddon is looking better and better.
Regards,
Bill Bonner,
for The Daily Reckoning
Joel's Note: Addison Wiggin recently released an eye-opening presentation that describes just what this Armageddon could look like. It's eerily prescient; and while we found it difficult to view, we also found it incredibly enlightening. We urge you to take a look for yourself, right here.
| | | | | | | Bill Bonner | | Debts Make a Deal | | | Reckoning from Paris, France...
Yesterday, we thought we made a breakthrough. For a second, it seemed as if the clouds had lifted. We had an illusion of comprehension; we thought we saw clearly what was going on.
After a certain point, debt becomes toxic – for a household as well as for a nation. For a nation, Professors Reinhart and Rogoff put that 'point of no return' at 90% of GDP. Greece, Japan, and the US – all are beyond that point. America's gross debt is 100% of GDP. Greece has debt of 120% of GDP. And Japan is off the charts, at 229%.
Reinhart and Rogoff say that once you get past 90% your GDP growth declines by 1%. Sure enough, the US used to run at about 3% annual GDP growth. Now it is down around 2%. Greece, the last time we looked, would be lucky to get any growth at all this year. And Japan, the biggest debtor of all, is actually going backwards...with negative growth.
When you are in this situation, by the way...you can't "manage" it. You can't ignore it. You can't turn knobs or adjust levers to make the problem go away. And you can't grow your way out of it either...because the debt suppresses your growth.
All you can do is to get out of debt...as soon as possible. Default. Go broke. Chapter 11. Chapter 7. Turn your pockets inside out and your mouth down.
Let it be.
Borrowing more money to keep from admitting the truth is disastrous. Europe just proved it.
Word got out yesterday morning that Europe had solved its Greek debt problem. As predicted, the authorities cobbled together an odd boot. And now they use it to kick the can further down the road.
But the nice thing is this: it's now a smaller can. After resisting the inevitable for more than a year, the authorities are finally giving bondholders a 20% haircut. The New York Times:
The pact, negotiated in Brussels, is part of a rescue package of 109 billion euros, or $157 billion, for Greece, the most troubled economy in the euro zone. It will force many investors in Greek debt to accept some losses on their bonds.
The deal would also provide substantial debt relief for Ireland and Portugal. And by giving the main European rescue fund increased powers to assist countries that have not been bailed out – like Spain and Italy – leaders are betting that the program, described by some as a new Marshall Plan for Europe, will serve as a firebreak against the contagion that has threatened to engulf some of the region's largest economies.
Officials have long shunned proposals that would make banks and other creditors share some losses on Greek debt. But European leaders are taking the calculated risk that they can avoid spooking investors by expanding the aid package to include other troubled countries on Europe's periphery. By afternoon, investors were buying heavily. They couldn't be bothered to read the fine print or think too deeply about what the bailout meant. All they knew was that the trouble was behind them.
The Dow rose 152 points. Oil went up too...close enough to $100 as to leave a smudge. And gold went down $9, closing at $1,587.
Gold seems ready for a rest. It's been marching uphill for the last 11 years. Time to sit down and have a drink, no?
The debt deal in Europe doesn't solve the problem. The can will be kicked again. But at least the 20% loss to bondholders reduces its size. It's now back to about where it was when the euro geniuses first started to kick it down the road!
Naturally, reports of salvation in Europe turned attention to America's budget troubles.
"Hope for US debt deal," says The Financial Times headline.
In Washington, of course, the problem is a little different. It's the central government that needs to be saved – from itself.
And here we find a political movement The Daily Reckoning can stand...far...behind. Yes, we support that narrow fringe of the Tea Party, the tiny part of it not invited to share the cakes and sandwiches, the part that actually wants the US government to default.
Whoa! We know what you're thinking. A default would be dangerous. Suicidal. Unthinkable. Ben Bernanke. Tim Geithner. Larry Summers. They all said so! The old folks wouldn't get their medicine. The soldiers wouldn't get their ammunition. Tops would go back onto honey pots all over the Washington DC area. The whole system would fall into anarchy and pandemonium. There would be riots. Revolution. Bourbon would disappear from the liquor store shelves. The dead would rise from their graves and the living would fall into the open holes. A man would be happy to see his dead wife alive again. Another would be even happier to see his living wife dead!
Well, maybe they're right. It would probably be a catastrophe. A disaster. But let's take the chance anyway!
Because the real problem is debt. The quicker it is eliminated...the faster the economy can get back to work.
So, don't raise the debt ceiling. Let the feds figure out how to get by like everyone else – spending no more than they take in as income. Is that really so tough?
And more thoughts...
"What do we have to talk about?"
Your editor was curious. He and his wife had gone down to the country. They found themselves – for the first time in their lives – alone together, in a big, quiet house.
For more than a quarter of a century, they have known little quiet. Their dinner table, for example, was always animated by young voices. One needed a new pair of tennis shoes. Another was mad because he thought he should not have to wash the dishes. One was late to dinner...another was early to leave.
The parents' conversation was always dominated by the children's concerns.
"Stop squabbling and set the table," Pater Familias might be heard to say.
"Don't forget to do your German homework tonight," Mater Familias might add.
"Yes, we're going to church tomorrow." "No, you can't invite a friend for the weekend." "Maybe I'll get you a new pair of skates." "No, I didn't give your brother a bigger piece of cake than you got."
A dinner was never a calm affair. Too many little squirmy bodies at the table. Too many complaints. Too many unsettled arguments and too much unresolved, teenaged angst.
So, the parents might have sighed at least once or twice over the past 25 years and longed for the day when the children had left.
Then, the day came. Last Saturday. Edward, having graduated from high school, went on a trip with friends.
"I mean," Elizabeth continued, "now there are only two of us. What are we going to talk about?
"This is a big change in our lives. Now, we have to talk to one another. I guess we find out what each other has been thinking. Maybe we find out how we've changed.
"Until now, our lives and our attention have been focused mostly on the children. They needed a lot of attention and we can't regret it.
"I suppose that is why we know so many couples who split up after the children leave. When they are raising children they feel like they have a job to do, together. They may not always agree, but they can't deny there is work to do. And so they do it, keeping their heads down...focusing on the project they share.
"Then, when the children are no longer there, who is there to talk to? The work is over...or at least, the immediate, urgent part of it. What do they say to one another? Now, they look up and see someone across the table. Someone who is older than the person they married. And different. And I guess, many times, they find that they have little in common...or don't enjoy each other's company."
"Honey, I like your company..." said the husband.
"Yes, and I like yours," said the wife, picking up the newspaper.
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com
| | |  |  |  | The Costs of Printing Money
In Europe or America, the situation is basically the same. The central authorities can rescue anyone they want. They have printing presses. But there are costs to money printing. America's conservatives are afraid the nation will be driven to bankruptcy…unless they are able to get control of the situation now.
Visions of Phony Economic Growth
Overconfidence in Paper Currencies | China: Where Money Is Treated Best
I am sure that Mr. Pento is right because every country on the Face Of The Planet (FOTP) is desperately creating more and more money, and the money will eventually find its way to the place where it is treated best and/or has the best prospects, which is, in this case, Bob. Oops! I meant "China."
Buying Gold on the Price Inflation Guarantee
Awaiting the "Zero Hour" of Available Credit | Devastating Portrait of a US Government Default
In a recent article, Simon Johnson, a former IMF chief economist and senior fellow at the Peterson Institute for International Economics, paints an revealing picture of how he envisions a debt default devastating the US economy. The portrait is that of a series of ever more destructive dominoes toppling over...
Ray Dalio: A Deleveraging Period for Ten Years or More
A Debt Ceiling Deadlock Resolution? | |
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House Speaker John Boehner pulled out of talks with President Obama for a deal on the debt ceiling.
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