US Economic Outlook 2008-11+

All is not what it seems, and our US economic troubles are far from over!

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Best regards

Randy

San Francisco Federal Reserve Symposium

I'm reposting this article back towards the top of my Blog--for those of you who haven't yet read. If you have the time, take a look at the comment section also.

Last Thursday afternoon (April 10th) I had the opportunity to attend a three-hour Fed symposium at UNLV and meet three representatives of the Federal Reserve Bank of San Francisco. This symposium is held biannually and is geared towards providing Undergrad and Grad students with a better understanding of the operations of the Federal Reserve Banking system.

I’m a friend of someone who is enrolled in an executive MBA program and we often discuss current economic conditions and the Fed Reserve System, so when he became aware of this symposium, I was the first person he thought of and invited.

The symposium started with welcome introductions and was quickly followed by a 24-slide presentation/briefing from Karen “S” (Manager of Administrative Services, Banking Supervision and Regulation, FRBSF) on current banking conditions and trends.

Karen has worked for the Federal Reserve Bank of San Francisco for over 20 years and prior to that, worked for Barclays bank for 10yrs, so one would surmise she is well seasoned in her field.

Karen discussed the regulatory role of the Fed and several other regulatory agencies (FDIC, Office of Thrift Supervision, Comptroller of the Currency—Administrator of National Banks, etc) and then moved on to cover the Top-3 current Banking Risks:

1) Subprime & Residential Lending
a. Mortgage underwriting weak
b. Consumer Disclosures questionable
c. Property values continue to decline

2) Commercial Real Estate
a. Loan concentrations high
b. Properties unoccupied

3) Liquidity Risk
a. Non-core funding dependence increasing

Each of these areas was covered with slides/charts/graphs etc, but there were really only a few takeaways worth sharing:

1) National home prices have already dropped 9% (Peak-to-trough) thus far, but the briefing suggested we should expect to see a total drop of 20% by Spring 2009—Sub-prime resets, falling home values and tight credit conditions being the main factors (1 of every 4 subprime residential loans is in past due status)

2) National Foreclosure rates are at a 27 year high and expected to worsen

3) 12th District Bank Construction and Land Development Loan Concentrations at all-time highs (% of equity vs. Allowance for Loan and Lease Losses); much higher than even before or during the 90’s California RE collapse

4) Many bankers are “in denial” and not acknowledging problems; loans are being downgraded to “substandard” or worse; bank loss rates rising sharply

5) Bank Construction and Land Development loss rates likely to go much higher

6) Many issues on the radar screen for Banking Risks—Credit Risks, Compliance, Market/liquidity Risks, etc.

During her briefing, Karen heaped most of the blame for our current housing crisis on relaxation of underwriting standards, mortgage fraud, predatory practices, etc, but she spoke not one word about partial responsibility being tied to fed policies. After listening and twisting in my chair for some time, I finally asked: “You’ve placed much of the blame for our current housing predicament on all these factors, but you’ve not once addressed Fed policy and the fact that Greenspan held interest rates at a 40 year low for far too long… Don’t you think the Fed deserves part of the blame for this crisis?”

After a somewhat long pause came the words: “Well yes, Fed policy was partly to blame.”

Karen then searched for thoughts/words to make her answer seem less “Fed-negative” than it was, so she tried to refocus and babbled on for quite some time about how these ultra low rates and Fed policy provided the opportunity for millions to live the “American Dream of home ownership -- even if it was just for a short time. "

I was incredulous and couldn’t believe my own two ears. The whole time she spoke of this, I was thinking: Sure, inept Fed policy/easy money allowed MILLIONS to “taste the American Dream” -- but now MILLIONS will lose their homes, ruin their credit, ruin family relationships, lose jobs, etc, but she felt it was all worth while… "They tasted the Dream.”

Bottom Line: Her reply was absolutely ludicrous. But what else should a person expect to hear from a Fed employee who drinks the Kool-aid?


Next up was Renee “C”, a rather young, attractive Fed Research Analyst who presented a briefing on the Federal Open Market Committee (FOMC). Renee spoke with a bubbly/positive outlook on things, but seemed a bit naïve – she struck me as a regurgitator of data that has been heard/learned over time, but really incapable of independent thought or an understanding of the “Big-Picture”.

She did however appear to be very enamored/proud to be employed by the SF Fed -- a true Fed Soldier.

Renee discussed:

1) Her Group’s Role at the Fed
a. Public Information
b. Economic Research

2) US Monetary Policy Goals
a. Maximum sustainable output and employment
b. Stable prices

3) Tools of Monetary Policy
a. Open Market Operations
b. Discount Window
c. Term Auction Facility
d. Primary Dealer Credit Facility
e. Term Securities Lending Facility
f. Reserve Requirements

4) Monetary Policy Meetings
a. Eight times a year in Washington DC

5) Monetary Policy Decisions
a. National in scope
b. Forward looking
c. Tradeoffs of between short-term and long-term goals

6) Fed Policy Statements
a. A secondary policy instrument (first is the Federal Funds Rate)

7) Economists at the Fed—who they are/what they do
a. Fed is the largest employer of economists
b. Economists conduct and publish research
c. Produce economic briefings for FOMC members

Early on in the briefing, Renee put up a cartoon depicting Bernanke holding a balloon inscribed with the word "inflation" in one hand and a rope tied to a dollar sign tilting off a ledge in the other, and then asked if anyone can interpret what the cartoon is trying to say.

I stated the Fed is worried about inflation, which is rising, but can’t do much about it by cutting rates and therefore risks allowing the dollar, the world’s reserve currency, to fall off a cliff—and added: “He is in quite the pickle right now…” Renee politely giggled and said, that’s good, but I’m actually using the dollar to depict the US economy, and as for the balloon, inflation always needs to be positive, but not too high… It must be a delicate balance and the fed walks a fine line…

Later, when discussing Monetary Policy she stated that: “Monetary Policy Lags and needs time to take effect” which I agree with, but I stated “Inflationary Policy also lags.”

I don’t know if she really understood my point: Using the numerous new Fed Tools to inject while cutting rates is highly inflationary and we consumers are already feeling the first wave. With the many recent/deep cuts yet to take full effect, it’s only going to get much worse (while the dollar gets creamed)…

I also asked if Fed decisions are politically influenced. (e.g. reporting to the public that the glass is half full vs. half-empty). Renee was firm in stating that analyst research and the sharing/publishing of data is NOT politically motivated and she highly doubts that the FOMC public release is either.

My thoughts were: Move along now, nothing to see here… Continue drinking the kool-aid and all will be fine…


Yelena “T”, Ph.d. Economist of Russian decent, gave the last economic briefing. Yelena was pleasant, seemed to be very intelligent (far more so than the other two), but you could sense that she was only providing surface-level, somewhat optimistic forward looking data, and seemed to be holding back on what could be said to the audience.

Yelena discussed:

1) Current Economic Outlook
a. GDP is dropping faster than earlier Fed Predictions
b. Personal income is flat/dropping slightly
c. Consumption expenditures—a noticeable drop
d. Unemployment is increasing; employment fell for 3rd month
e. Weaker Dollar (Note: she stated a weaker dollar is good for US exports. I chimed in: “That’s good, but we’ve exported most of our manufacturing capacity and until we get it back we’re still going to continue running MASSIVE trade deficits.” Oil yesterday hit $112 and the Yuan broke 7 to the dollar and is gaining speed. Inflation can mainly be attributed to a weak dollar — she nodded/seemed to agree with all)
f. Real GDP Growth has been reduced by a decline in Real Residential Investment
g. Inflation is a source of concern (depicted charts of Core PCE, Total PCE and CPI rising above trend line: I wanted to state that her "understaed" numbers were all completely bogus, but it would have been inappropriate in this collegiate setting)
h. Mixed Signals for long-term inflation expectations

2) Federal Reserve Board of SF National Forecast
a. Little GDP growth in first half 2008, but likely improvement in 2nd half
b. Monthly GDP forecasts have fallen every month since Aug 07
c. Inflation should decline going forward due to slower economy
d. Housing inventories climbing; >2x higher than normal; downward price pressures

3) Potential Risks to their Forecast
a. Continued home price declines may impact construction and consumer spending more than anticipated
b. Continued tightening of lending standards may make housing situation worse
c. Jumbo mortgage rates remain high; increased spreads between 10yr Treasury rate and Mortgages rates -- even conforming mortgages
d. Increased Credit Market Stress

When the briefings were finished, the forum was open to questions. A few relatively easy questions were asked by audience members and were promptly answered.

I later, after much internal consternation, asked how we can sit here and discuss rate cuts, stimulus packages and Monetary Policy, yet fail to address our ailing US Dollar and it’s faltering status as the World’s Reserve Currency. I highlighted that back in 1971, US total monetary aggregate was merely $700 Billion, but now it’s > $14 Trillion and is growing by 18% annually.

I then stated numerous countries have already pulled or are discussing pulling their currency-dollar pegs (due to high domestic inflation rates—as they have to print money as fast as we do). I also opined that Treasury Secretary Paulson and Bernanke’s “Strong-Dollar policy” is preposterous/laughable. How can they continue to cut rates/inflate while the dollar falls to all time lows around the globe, yet “claim to support a strong dollar?” (Note: I was getting a little worked up by now)

I was told this “Dollar Exchange Rate” issue isn’t really taken into account when discussing Monetary Policy, but there are departments internal to the Fed that do study monetary exchange rates/etc. Additionally, I was told that monetary aggregates aren’t important or studied. (Internally, I laughed at the ignorance).

I had many, many more questions/concerns boiling inside of me, but at this point, I had already been the most vocal audience member of the day and had taken far too much of the forum’s time… It wasn't like I was getting intelligent answers anyway… So I bit my lip and said no more.

In closing, what more can I say -- except that I expected more from this symposium. Here were three Fed Bank employees with many years of economic experience, yet their answers seemed uninformed and absolutely baffled the informed mind. I guess that’s what Fed programming/propaganda does to a person. Drink the misinformation Kool-aid for too long and become part of the problem -- passing on ignorance as fact and supplying high school level, nonsensical answers to those with valid questions/concerns.

If these three folks actually represent a typical cross-section of Fed employment/knowledge base, then God help us all, because the misinformation/ignorance problem we have is much bigger than even I thought.

Best regards and until next time

Randy

Economicrot Homepage

INFLATION or HYPERINFLATION

It seems the masses still believe our skewed government inflation statistics. Yes the stats that regularly get spouted by the babbling heads in the media… Sure, these same folks end up scratching their heads while paying higher prices for nearly everything, but why should they doubt what the government and the boobs on TV have brainwashed them to believe? Certainly, the government is looking out for our best interests—Right…?

ABSOLUTELY WRONG!

The government knows that most believe their blatant lies, therefore (in a futile attempt to manipulate the system ever more--to keep the banking/financial systems from collapsing) they continue to press the limits of common sense and their lies become ever more egregious. Eventually, (and it’s not too far off now) the masses will finally wake up and realize that they have been duped. By that time however, inflation will have eaten them alive.

So what is inflation? Nearly everyone understands that inflation is an increase in the price of goods and services, but what actually causes these increases? Well, those who follow the government’s skewed doctrine falsely believe that inflation is caused by higher wages, which in-turn causes more people with extra money to chase the same number of tangible goods--driving up prices. In reality though, inflation is actually caused by excess growth of the money supply, without a commensurate increase in the supply of goods and services.

OK, so what does that really mean? Well, the powers that be have absolute control of something called a “printing press” and they use it to create money (backed by nothing) at ever increasing rates. They inject this money into the banking systems and economy to keep inflation going, because if they stop doing so, deflation will set in—which can lead to an Economic Depression.

The problem right now is: The largest speculative bubble in our world’s history is beginning to deflate (Housing Bubble) and its reverberations are being felt across the entire globe: Hedge funds are collapsing, bank write-downs are massive, toxic waste marked-to-model Commercial Paper (CP) sitting in off-balance sheets cannot be offloaded (and will soon have to be accounted for), credit markets are drying up, and home foreclosures (the catalyst to all these problems) are just now getting started. (See Mortgage Rate Reset Chart Below—The resets have merely begun ):



The Fed and US banking systems understand that deflation is setting in and are now operating in crisis mode... In a brazen attempt to prevent a collapse of the entire banking/financial systems (and hence the US Economy) “Helicopter” Ben Bernanke (under severe pressure from Treasury Secretary Henry Paulson and the many heads of leading financial institutions) has sacrificed the dollar in the hopes of printing/inflating our way out of this mess.

What do you mean he sacrificed the dollar? Well, by virtue of the Fed lowering short-term rates and printing/injecting money at the fastest rates ever seen in history, foreign holders of US dollars (now holding over $4.4 Trillion in US Government Debt) understand that the inflation tide is coming in; they know they can make better returns on their savings elsewhere, and therefore they have started to offload their massive dollar holdings.

Additionally, for decades now, many foreign countries have pegged their currencies to the US Dollar, but recent inflation increases, internal to their domestic economies, is becoming far too severe for them to handle (with the dollar peg, they have to print money as fast as we do, and it is stoking inflation), therefore several countries have started a new trend of depegging. Recently, Vietnam, Qatar and Kuwait have depegged, while a host of others are in line to do the same. When this depeg happens on a larger scale (not if, but when) inflation within our borders will SCREAM. Why? Well, as they de-link from the dollar, their currencies become stronger causing our import costs to increase Commensurately (e.g. Oil, consumer goods, etc).

BOTTOM LINE: To prevent deflation, the US Fed is creating inflation at the fastest pace in history and the dollar gig is nearly up! See chart of M3 Money Supply Growth below (Recreated by Shadow Government Statistics): M3 is growing by >15%



Additionally, take a look at the US Dollar Index (below). NEVER before in our country’s history has the dollar been weaker—and it’s only going to get worse as this banking crisis evolves and the inflationary escape mechanisms (printing presses/monetary injection) are blatantly overused, while at the same time a greater number of countries de-peg their currencies from the Dollar.


Recent data from the Bureau of Labor Statistics suggests that current inflation in the US is running at modest annual rate of 3.6%.

“ Consumer prices increased at a seasonally adjusted annual rate (SAAR) of 1.0 percent in the third quarter of 2007, following increases in the first and second quarters at annual rates of 4.7 and 5.2 percent, respectively. This brings the year-to-date annual rate to 3.6 percent and compares with an increase of 2.5 percent for all of 2006.”

Maybe it’s just me, but my Seat Of the Pants Inflation-o-Meter (SOPIM) and my empty wallet are both telling me that inflation is running at a much, much higher rate than that... I’m now paying $3 a gallon for gas and $3.50 for a gallon of milk; my electric rates were jacked up twice last year; car insurance premiums were increased; It cost me over $40 bucks just to take my kid bowling the other day; hell, it now costs $10 a person to see a movie—forget about popcorn and a soda.

So, why does there seem to be a disparity between my SOPIM and Government provided statistics? BECAUSE THERE IS A DISPARITY AND THE GOVERNMENT NUMBERS ARE ABSOLUTE BALONEY!

Take a look at the Consumer Inflation graph below. The red line depicts the inflation statistic our government officials want you to believe (inflation is moderate)… They calculate this rate by excluding many food and energy products, by using rent vs. mortgage costs and by using substitution methods (e.g. steak prices showed a spike this quarter so we’ll substitute our calculations with the price of hamburger) and Hedonic Adjustment Methods (e.g. a computer has twice the processing power of the previous model but at the same cost—therefore cost has been reduced 50%)—Bottom line to these red numbers: It’s all a Con Job!

With all that said, now take a look at the blue line in the same graph. This line accurately illustrates our real rate of inflation in the US and is calculated by using the same metrics that were used prior to a change of rules that took place just before the Clinton administration took office. As you can clearly see, today's inflation rate is actually running at >10%… Now that seems to be more in line with my SOPIM.

So, why does the Government lie about Inflation? Well, by virtue of using this fictitious inflation number in a myriad of annual government calculations, the government can reduce the cost of obligations and entitlements programs (e.g. Social Security and other Government employee cost of living increases {think military and civil servants here}, Medicare payments, welfare increases, etc), as each program receives an annual COL increase based on the reported inflation index.

Additionally, these bogus lower inflation numbers are also used to make Gross Domestic Product (Economic Growth of the Country) look much better than it really is... If the higher (actual inflation) number were to be used, GDP would be abysmal (See blue line in the GDP chart below—this line illustrates actual GDP based on the true >10% rate of inflation). WE Have Negative Growth my Friends!


So, what if, after reading this long explanation, you're still having a hard time believing that the government would lie about inflation numbers? Ok, that’s completely understandable, as we’ve all been programmed to think a certain way for far too many years to change on a dime… So, lets look at it another way.

Why did the price of gold reach a 28-year high last Friday (closed at $806 oz)? Well, the reasons are: Gold is SCREAMING to us that the Fed will continue to try and inflate our way out of this banking/financial market crisis and will do anything to prevent deflation—including hyperinflation. Gold is telling us that smart money is seeking safety as the dollar is thrown off a cliff. Gold is telling us, all is NOT WELL in the economy and your savings will soon be eaten alive by inflation. Gold is telling us that people are scared. Gold is saying, batten down the hatches cause a trainwreck is unavoidable!


I know it’s hard for people (who have been conditioned to believe in the everlasting greatness of our country) to think or believe that things could spiral out of control, but they can. Never in the history of the world has a fiat based economy lasted beyond a few decades. Since 1971, when the dollar was pulled off the gold standard, the dollar has been 100% fiat—a currency based on nothing but a promise--a promise that cannot be kept.

Bottom Line: There are no set limits, no regulation controls, and there is absolutely no one holding public office who can tell the Federal Reserve Banking System (a group of Private bankers who control the nations currency) how much money they can or cannot create. The Fed has complete control of our monetary system and they will do anything they can to prevent the massive banking crisis/financial storm they see on the horizon. Problem is: Short-term rates, Printing presses and liquidity are their only options.

Hyperinflation here we come!

Peter Schiff video on declining dollar, purchasing power, credit problems, etc: LINK

A Closing Funny

Regards
Randy