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Thread: Latest FED Commentary - Ben Bernanke analyzed by Karl Denninger

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    Default Latest FED Commentary - Ben Bernanke analyzed by Karl Denninger

    the 'shape of things to come' ? - from

    (snip)"Bernanke Threatens Congress (Again)

    Gee, big surprise...

    At about 9 percent of gross domestic product (GDP), the federal budget deficit has widened appreciably since the onset of the recent recession in December 2007. The exceptional increase in the deficit has mostly reflected the automatic cyclical response of revenues and spending to a weak economy as well as the fiscal actions taken to ease the recession and aid the recovery.

    Except that the "automatic cyclical response" never went away after 2003. Then it was compounded. So when does it go away Ben?

    Of even greater concern is that longer-run projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show the structural budget gap increasing significantly further over time. For example, under the alternative fiscal scenario developed by the Congressional Budget Office, which assumes most current policies are extended, the deficit is projected to be about 6-1/2 percent of GDP in 2020 and almost 13 percent of GDP in 2030.

    Remember that the CBO said we'd have no Federal Debt in 2010 (in 1999.) How'd that work out? Do you think they're just a wee bit optimistic?

    One reason the debt is projected to increase so quickly is that the larger the debt outstanding, the greater the budgetary cost of making the required interest payments. This dynamic is clearly unsustainable.

    Right. This means you have to run a primary surplus to stop that dynamic from taking hold. There is no other means to do it, and the longer you wait to do it, the worse the cutting is that has to take place to get there, because you're starting from a larger baseline both on deficits and accumulated debt.

    Perhaps the most important thing for people to understand about the federal budget is that maintaining the status quo is not an option. Creditors will not lend to a government whose debt, relative to national income, is rising without limit; so, one way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. These adjustments could take place through a careful and deliberative process that weighs priorities and gives individuals and firms adequate time to adjust to changes in government programs and tax policies. Or the needed fiscal adjustments could come as a rapid and much more painful response to a looming or actual fiscal crisis in an environment of rising interest rates, collapsing confidence and asset values, and a slowing economy. The choice is ours to make.

    The choice was ours to make in 2007. Bernanke, Paulson and others argued for more spending "now" and cuts "never." We now have four years into this, with three of them running deficits over 10% of GDP. Remove that deficit and GDP contracts by at least 10%. Fail to remove it and eventually you reach that point where the choices are made for you.

    Time is running out to make the choices on our own.

    The primary long-term goal for federal budget policy must be achieving fiscal sustainability. A straightforward way to define fiscal sustainability is as a situation in which the ratio of federal debt to national income is stable or moving down over the longer term. This goal can be attained by bringing spending, excluding interest payments, roughly in line with revenues, or in other words, by approximately balancing the primary budget. Given the sharp run-up in debt over the past few years, it would be reasonable to plan for a period of primary budget surpluses, which would serve eventually to bring the ratio of debt to national income back toward pre-recession levels.

    My God, he said it.

    That's a first.


    Fiscal sustainability is a long-run concept. Achieving fiscal sustainability, therefore, requires a long-run plan, one that reduces deficits over an extended period and that, to the fullest extent possible, is credible, practical, and enforceable. In current circumstances, an advantage of taking a longer-term perspective in forming concrete plans for fiscal consolidation is that policymakers can avoid a sudden fiscal contraction that might put the still-fragile recovery at risk.

    No. The longer you wait to do it the harder it gets, and at least as importantly the more-addicted the people (and businesses) get to the "free ****" game that has been run. When you run 12% of GDP in deficits you're basically preventing the recognition of and adjustment that should come from an economic depression.

    We've been doing it for three years straight.

    Recently, negotiations over our long-run fiscal policies have become tied to the issue of raising the statutory limit for federal debt. I fully understand the desire to use the debt limit deadline to force some necessary and difficult fiscal policy adjustments, but the debt limit is the wrong tool for that important job. Failing to raise the debt ceiling in a timely way would be self-defeating if the objective is to chart a course toward a better fiscal situation for our nation.

    Sorry, but I disagree.

    The "FSA" (Free **** Army) will not stop demanding their free ****, and they vote for it. It is therefore necessary, and unavoidable, that the Legislators and Executive be willing to "fall on their political swords" to stop this cycle now, because there is no evidence that it will EVER be acceptable to the people to do it "tomorrow."

    We thus are choosing between doing it now or not doing it at all. The former is bad, the latter disastrous.

    There is no choice folks. Bernanke wants you to believe in candy-crapping unicorns that will somehow make the decisions that must be taken palatable tomorrow when they are not today.

    But politics doesn't work that way. When you have screaming women and children on one side and screaming Seniors on the other, you either put your foot down and say "No!", knowing full well it is likely to cost you your job, or you say "yes, we'll deal with it tomorrow" knowing you will deal with it never.

    The latter choice is disastrous because for each day we delay in consolidating the budget, reducing spending to meet revenues, we increase the total amount of economic harm the economy and the people in this nation must absorb. The time to do this was in 2007 when we should have forced all the banks into bankruptcy and cleared the property market. We would have had a horrific Depression but by now it would be over and Americans would be able to buy homes again, our economy would be recovering, and the big problems we have would have been addressed.

    Instead we kicked the can and added more than $4.5 trillion in debt to the problem - a 40% increase in just three years from where we were in 2007.

    We cannot continue on this road - not even for another month. "(snip)


    The fairly obvious take-away is that the FED is now recommending to congress that fiscal gov't policy be changed to produce 'primary surplus' gov't budgets ... which is FEDspeak for significant tax increases and/or gov't spending cuts.

    The less obvious take-away is that the FED appears very concerned that, with the end of QE2 printed money gov't bond purchases at the end of this month, interest rates on US gov't bonds thus the percentage of federal tax revenues that must be 'diverted' to pay interest on gov't bonds ( thus no longer available for spending on gov't employee paychecks, on social welfare benefits etc. ) is going to rise significantly.
    Last edited by Melonie; 06-15-2011 at 01:08 AM.

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    Default Re: Latest FED Commentary - Ben Bernanke analyzed by Karl Denninger

    The Republicans are both right and wrong in their current stance vis a vis the budget and deficit. They are wrong if they seriously think that we can manage this mess ( I don't think we will ever get "out" of it ; not in my lifetime ) without generating increased revenues. With an aging population creating growing demands on the budget we MUST increase revenue, cut spending , raise the retirement age and means test entitlements. Do Warren Buffet or Jack Welch need either Medicare or Social Security ?

    They are right in NOT trusting Obama ( in the person of his errand boy Biden ) and the Dems. Not if they know and remember their history. In the mid-80's Reagan made a deal with the Congress - two dollars of spending cuts for every dollar of tax increases. Reagan went along with the tax increases but Congress reneged on the spending cuts. The only thing they wanted to cut was Defense. When Bush The Smarter was President , Congress came to him with the same lousy deal. Unforgiveably, Bush either was an idiot ( it runs in the family ) or had an incredible case of amnesia. He was THERE when Reagan was lied to yet he trusted the same bastards and assholes. He waved off warnings from a few conservative Republicans like Gingrich that the budget cuts would never materialize and instead listened to Dick "The Dick " Darman.

    If, IF the Republicans are playing hardball and insisting on budget cuts first ( REAL , serious cuts ) before even talking about increasing revenue then I argue that they are doing the right thing. Historically, when Congress gets more money, they spend it. Secondly, the BEST way to get increased revenues is to increase growth and broaden the tax base and NOT to just raise rates willy nilly.

    Btw, it is true that the CBO predicted that we would eliminate the Federal Debt by 2010. What they didn't know was that we'd have a recession and an idiot in the White House who gave us two wars and a new entitlement with no way to pay for them other than to borrow more money. Followed by another idiot who knows even less about economics than his predecessor and doubled down on both the deficit and Federal Debt.

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    Default Re: Latest FED Commentary - Ben Bernanke analyzed by Karl Denninger

    ^^^ which, in real world terms, probably brings us to QE3 within a few months as the gov'ts only politically palatable means of reducing 'real' entitlement spending and gov't paychecks without actually reducing the amount of dollars being paid out in benefits and salaries !!!

    I hope that you hung onto all of your precious metals investments !

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    Default Re: Latest FED Commentary - Ben Bernanke analyzed by Karl Denninger

    Quote Originally Posted by Melonie View Post
    ^^^ which, in real world terms, probably brings us to QE3 within a few months as the gov'ts only politically palatable means of reducing 'real' entitlement spending and gov't paychecks without actually reducing the amount of dollars being paid out in benefits and salaries !!!

    I hope that you hung onto all of your precious metals investments !
    I certainly did. I confess to a bit of profit taking on gold futures, but I hung on to my gold and precious metals stocks and my gold coins.

    I HOPE you are wrong about QE3 but I fear that you may be right.
    Last edited by Eric Stoner; 06-16-2011 at 07:02 AM.

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    Default Re: Latest FED Commentary - Ben Bernanke analyzed by Karl Denninger

    ^^^ for better or worse regarding QE3 the 'gold foil hat' crowd will tell you that there is no other way to cut the real 'cost' of worker paychecks without actually reducing the number of dollars in those paychecks ... no other way to cut the real 'cost' of welfare checks and social security checks without actually reducing the number of dollars in those gov't checks ... and no other way to cut the real 'cost' of paying interest and principal on ( mostly foreign owned ) US Treasury bonds without actually defaulting on handing over the number of dollars due !

    In reality, Bill Gross and some other economic 'realists' are pointing out that QE3 will actually take the form of 'Operation Twist 2' ... based on recent FED actions ...

    from

    (snip)"today's operation targeted 5-7 year bonds, or, simply said, bonds to the right of where as we noted yesterday, Bill Gross now believes Operation Twist 2 will take place. Furthermore, as Zero Hedge concluded yesterday, when discussing the 2-3 Year point on the curve, " why sell today at 0.44% when you can wait a month and sell them back to Brian Sack at 0.00%." Well, the 2 Year is not 0.00% yet... But is now at the tightest it has been since November, touching on 0.39% as everyone is now rushing to frontrun the Fed's interest rate cap on the 2 Year, which could possibly be as low as 0.20%. Also, that Operation Twist is nothing short of another unsterilized Quantitative Easing program, we expect that stocks and much more importantly, commodities, will soon begin to price reality in. Expect much more clarity when the June 22 FOMC meeting is released. In the meantime, observe the massive outlier that the 2 Year has been over the past two days, or since the release of the Gross tweet.



    Incidentally, if Gross is right about Operation Twist, he is also right about what will happen to the bond curve at the end of QE2, which now has just $47 billion to go.(snip)


    much more at

    and .


    For anyone who hasn't heard the term Operation Twist before, it was a FED practice that was first employed in the early 60's ... with little success.



    The perhaps not so obvious point about QE3 versus Operation Twist is that 10 year interest rates primarily affect mortgage interest rates, whereas 2-3 year rates primarily affect consumer credit cards and auto loan interest rates. Since the FED has nearly run out of 'dry powder' it now has little choice but to let the market forces drive short maturity bond thus credit card and auto / durable goods loan interest rates higher, while deploying what little 'dry powder' it has left to try and keep interest rates on longer maturity bond thus mortgage interest rates from also rising. There is also some embedded recognition of the fact that lenders have already protected themselves against some amount of credit card / auto loan losses via reducing credit limits on existing accounts / tightening borrower eligibility requirements for future accounts etc. As such, for those ( few ) people who are still eligible for new credit card / auto / durable goods loans a further increase in interest rates is NOT likely to drive up lender losses ( although it is highly likely to drive down sales ). On the other hand, where mortgages are concerned there are a shit-ton of Alt-A and Prime ARM's coming due for interest rate resets in 2012 ... where an additional increase in interest rates may prompt additional 'strategic defaults' thus major losses for the mortgage lenders.

    If this is actually what is / will be happening, it is bad news for most US consumers, most US small businesses etc. However it is semi-good news for underwater homeowners and big corporations. And, as always, the big Wall St 'member' banks will still play their guaranteed profitable 'FED arbitrage game' and simply shift the maturity of the gov't bonds they are playing with !

    ~
    Last edited by Melonie; 06-15-2011 at 02:57 PM.

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    Default Re: Latest FED Commentary - Ben Bernanke analyzed by Karl Denninger

    ^^^ Oh GREAT ! Just what we need. another inverted yield curve.

    Btw, mortgages are based more on the 30 yr. bond interest rate than the ten year note.

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    Default Re: Latest FED Commentary - Ben Bernanke analyzed by Karl Denninger

    ^^^ actually, according to the vacationing gentlemen bankers who actually underwrite mortgages, I'm told that they actually base capital requirements financing on an average 10 year life of a typical US mortgage. This is based on re-fi's, property sales etc. taking place for a large percentage of mortgaged properties.

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    Default Re: Latest FED Commentary - Ben Bernanke analyzed by Karl Denninger

    ^^^ I did not know that. Thank you.

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