International Forecaster Weekly

All The World Economies In Trouble One Way Or Another

Debt and lack of a solid recovery, a world economy in disarray, a bumpy ride is coming, banks and unqualified buyers, growth figures bogus, US economy a parasite, TSA patdowns, ISP spys for the state attacking privacy and civil liberties.

Bob Chapman | August 3, 2011

It was 15-months ago that we projected that the second half of 2011 and onward would present many financial and economic problems, and we have not been disappointed. There was federal debt and its renewal, which we are now suffering through, municipal debt problems, the lack of any kind of solid recovery and financial problems emanating from Europe. Making the situation more difficult is the statistical exposure at Princeton University that more than $5 trillion has been spent since 9/11 to create new wars in Iraq, Afghanistan, Libya and Pakistan, with more in the works.

Running neck and neck has been the federal debt issue and the second bailout of Greece and its affect on the debt problems of five other close to insolvent nations. Perhaps with the exception of Germany the world economy is in disarray. Every major economy otherwise is in trouble in one-way or another. That means we have a very unstable international monetary system in which some sovereign nations are in desperate shape. The Keynesian effects of QE1 and 2 and stimulus 1 and 2 and their equivalents have thus far proved to be futile. In spite of that most nations are about to embrace QE 3 or something akin to it, and make the same mistakes over again.

We are now approaching the autumn session in the temperate zone and we advise you to hold on tightly to your seats, because this is going to be a very bumpy ride. The political antics being displayed in regard to the US debt extension are going to cause a fall out, particularly in the US Treasury market as interest rates again to start to rise. What you have witnessed in the US Congress is not conducive to stability and recovery. In fact just the opposite is the case. If you combine US with European problems you have double trouble.

Over in Europe the Greek crisis has become a European crisis. We wonder when Europe is going to wake up to the fact that Wall Street and the City of London are attempting to destroy the euro as a viable alternative to the dollar as the world’s reserve currency. In spite of this the euro has so far held its own, as the dollar has faded against not only the USDX, but against gold and silver as well. There are those who believe that the euro and the EU have been revitalized, but we see Europe somewhat differently. The movement of more nations into the euro has not been due to stability, but to a weakening US dollar and assistance from China and Russia. The elitist powers in NYC and Washington have no intention of losing the dollar as the world reserve currency.

We said 1-1/2 years ago that the solvent countries could not handle the bailout of six nations that were on the edge of bankruptcy. If the EU-IMF-bank bailout of Greece goes as planned within 1-1/2 years Greece will not have met its commitments and the game will be on again. There is no question at that point that the solvent nations will balk, the euro will fall and perhaps even the EU. That is because the contagion will have spread to the other five troubled countries. These events will in turn trigger the debt bombs in England and the US. The interconnectivity that the elitists wanted so badly will finely be their undoing. The precursor to this is the rating downgrade we have witnessed just recently.

The world economy is slowing down and that is going to compound problems. That is why transnational conglomerates and others continue to lay off staff and hoard cash. They have an idea of what is on the way. This is why QE cannot end until forced to be ended by hyperinflation. At the same time the value of assets is wasting away, although held up in part by inflation.

Governments worldwide continue to issue debt, as central banks broaden their balance sheets. More than $5 trillion has been added to the world’s money supply and there seems to be no end in sight to this desperate, reckless policy. The notion of too big to fail has been adopted worldwide.

Do you believe it’s normal for bankers to issue loans to totally unqualified buyers? Of course it isn’t.

As we predicted eight years ago when we said Fanny Mae and Freddie Mac were broke and would be absorbed by government, we also said eventually housing would be nationalized. Once the too big to fail banks cannot handle the foreclosed properties on their books they’ll allow the taxpayer to step in via Fannie, Freddie, FHA and Ginnie Mae and assume the debt. Eventually government could end up owning all the housing stock, which would give them great leverage over the individual. National Socialism is the end goal. This just didn’t happen. Loose credit, a credit bubble crisis and an eventual collapse in the credit structure came about. It was engineered, it just didn’t happen. Do you believe it’s normal for bankers to issue loans to totally unqualified buyers? Of course it isn’t. These were and are prudent bankers, that don’t make those kinds of errors, unless told to do so. The big banks are in serious trouble as are municipalities, states and the federal government, as a result of what the Fed and the banking system have done. People have lost confidence in the Fed, the banks and government, and that shouldn’t surprise anyone. These observers see secret arrangements via the Fed, Bank of England and the ECB. They also question the costs and success of bailouts, increases in money and credit when the recipients are the financial community and governments. Little help has been given to citizens of these nations. These same people are now questioning why these nations are allowing central bankers to try to extend the problems into the future by using short-term palliatives? They are also asking why banks were lending to sovereigns when they shouldn’t have been doing so, under any circumstances. Even the low rates the banks charged were ludicrous.

We now see it is only a matter of time before Wall Street and the City of London realize how vulnerable their stock and bond markets really are. The financial system is in a shambles and all they care about is profits. The deal last presented and passed by the legislators’ means very little. The next Congress can change things by a vote. The whole bailout bill is on the come. Future triggers will not decrease Medicare and defense spending, because they will never happen. It was all political theater, and it was really all about cutting Medicare and Social Security as well as the imposition of a 12-member panel, which will resemble a star chamber preceding. The result will be continued distorted markets and more of the same spending. Little will be cut and the latest version of QE 3 will move forward, as inflation moves higher. The question is has the stock market already discounted such a deal and will gold and silver treat the agreement as a non-event? The market is hard to call, but gold and silver have been rising due to the dollar being replaced as the world reserve currency by gold and the fact that inflation is 10.6% and rising. The big losers are the American people and Congress.

You do not have to be a space scientist or brain surgeon to figure out that official GDP growth figures for the last quarter of 2010 and the first and second quarters are bogus. The last 2 quarters until they are changed again, showed GDP growth of 1.3%. If you extract inflation and QE 2 and stimulus of at least $1.8 trillion to $2.4 trillion doesn’t work, then what will work? The Treasury and the Fed don’t seem to know or they wouldn’t be doing what they are doing. They know they have to continue, because the Fed in recent years admitted that they were the cause of the Great Depression by putting insufficient funds into the system. Obviously they won’t do that again. Thus, they are doing just the opposite and they know that does not work either. One asks oneself, how can anyone who knows this have any confidence in the monetary system? It was this loss of confidence that took down the system in the 1930s and that is what will lead to its failure again.

The heart of the issue in the Fed and the Treasury is that they have to come to terms regarding fiscal spending, monetary stimulus and market manipulation. The markets are not free and the operations of the “President’s Working Group on Financial Markets” is simply driving more and more players out of the market, even professionals. It is impossible to trust or have confidence in such a system. Economic and market support should be limited, if used at all. We are looking at three years and $4.3 trillion of support, without which the economy would have collapsed. As a result recoveries have been of short duration with no lasting effects.

The Fed continues to deny the inevitable as does the ECB in the euro zone with bailout after bailout. The GAO tells us the Fed lent out $16.1 trillion two to three years ago and says nothing about it being paid back. The only way we found out what the Fed had done was by the Dodd-Frank legislation. The Fed may think re-flation is fine, but tell dollar owners who lose value every day. The idea that dollar profits will be perpetually recycled by exporters into Treasuries has begun to come to an end. If the greenback is weak and weakening why continue to hold it? That is why foreign forex holdings by foreign central banks has fallen from 70% a few years ago to 59%. This is why the Fed has to create money and credit to absorb about 80% of Treasury issuance. Many of these countries are relatively unsophisticated and are now beginning to endure lower exports. We are even seeing that occur in the export powerhouse of China. The Fed probably will buy as many Treasury, Agency and toxic waste bonds as necessary, but that does not address the underlying problems. It only demeans the dollar further and expedites foreign US dollar sales. It is true Asian central banks have a great stake in the US economy, but that is waning as exports falter and that may cause forced dollar sales to meet domestic financial needs. There is no question central bankers worldwide are hopelessly interconnected, and that they have to share an interest in helping sustain dollar strength and value. The question is will the dollar just get worn down as it has been, or will there be an event that will change that?

The EU, ECB and the IMF believe they have a second bailout formula in place, but acceptance won’t come for another month and it is possible it won’t come at all. That is if German, Dutch and Finnish citizens have anything to say about it. From Greece we are told hordes of experts are invading Greece to put values on Greek properties illegally put up as collateral secretly for the first bailout. It is a fire sale of Greek assets in the making as their country is stolen out from underneath them. At the same time 100,000 taxi drivers are demonstrating countrywide, because government wants to strip them of their licenses, so that foreign operators can enter the country and take over the businesses. The rape of Greece has begun with the assistance of its Communist, Illuminist Prime Minister. Greek problems are nowhere near an end. The worst is yet to come.

Thus far the Fed has been successful in keeping the wolves at bay, but for how long and at what cost. They cannot do what they are doing forever. Higher inflation is nipping at their heels and it is growing exponentially. Underlying creditworthiness comes under scrutiny every day. Everyone involved knows the system is dysfunctional and all are hoping the system does not disconnect. Sooner or later it must fail, as debt overwhelms monetary creation. Those who want safety from these machinations have one place to turn to and that is gold and silver related assets. If you do not move to protect yourself now there may be little or nothing to protect in the future.

 The federal government is planning to introduce new behavior detection techniques at airport checkpoints as soon as next month, Transportation Security Administration chief John Pistole said Thursday.

TSA already has "behavior detection officers" at 161 airports nationwide looking for travellers exhibiting physiological or psychological signs that a traveller might be a terrorist. However, Pistole said TSA is preparing to move to an approach that employs more conversation with travellers—a method that has been employed with great success in Israel.

I'm very much interested in expanding the behavior detection program, upgrading it if you will, in a way that allows us to….have more interaction with a passenger just from a discussion which may be able to expedite the physical screening aspects," Pistole said during an appearance at the Aspen Security Forum in Colorado. "So, we’ve looked at what works around the world, some outstanding examples and we are planning to do some new things in the near future here."

Pistole declined to elaborate on the enhanced behavior detection program but said it would "probably" be announced in August. During an on-stage interview with CNN's Jeanne Meserve, Pistole acknowledged that the Israeli techniques have been carefully examined.

"There's a lot—under that Israeli model—a lot that is done that is obviously very effective," he said. However, critics have said the Israeli program is too time consuming to use consistently at U.S. airports and may involve a degree of religious and racial profiling that would draw controversy in the U.S.

Pistole also said TSA is planning to test out some new methods for screening children in the wake of highly-publicized videos of children screaming as they were patted down at airport checkpoints. The TSA chief said adults have used children as suicide bombers before in other contexts and could do so through an airport, but there may still be better ways to screen kids. 

"I think we can do a different way of screening children that recognizes that the very high likelihood they do not have a bomb on them," Pistole said. "I think under our new protocols we would see very few patdowns of children." Instead, parents would be more involved in the process of helping TSA personnel figure out why a child is setting off alarms.

Pistole said adjusting screening for the elderly is more complicated because a large number of people on terrorist watch and enhanced screening lists are older. However, another pilot program is underway underway to identify people who have travelled very frequently for years and who could get an expedited screening.

Republicans and Democrats are turning to an enforcement tool, called a “trigger,” with a history of failure. Congresses have repeatedly ignored or overridden automatic cuts dictated in previous legislative agreements.

For that reason, budget and credit rating experts are skeptical of the device, and they are even more critical of the call in both the House and the Senate for identifying future cuts through a newly created bipartisan committee -- another Washington mainstay that can’t guarantee any real impact.

Not only was Preliminary Q2 GDP horrid, 1.3% vs. 1.8% expected, the BEA revised Q1 down to 0.36% from 1.92%. Real Final Sales of Domestic Product in Q1 is a scant 0.04%. Q4 2010 was revised down to 2.3% from 3.1%. And people trade and invest on this data?

The government scheme of revising past economic data lower to show better current month percentage gains is still operational and most Wall Street experts are mum or ignorant of it.

Remember when so many pundits saw Q1 GDP at 3.5% or higher? Remember how each subsequent Q1 GDP report revised growth lower? How low will Q2 be revised?

The BEA’s annual GDP revision pushed 2007-2009 (recession) GDP down to -5.14% from -4.1%.

Consumption increased only 0.1%; +0.5% was expected. Durable Goods Consumption tanked 4.4%...

Real consumer spending declined at a 1.3% annual rate, the first decline since Q2 2009.

Real federal government consumption expenditures and gross investment increased 2.2 percent in the second quarter, in contrast to a decrease of 9.4 percent in the first. National defense increased 7.3 percent, in contrast to a decrease of 12.6 percent. Nondefense decreased 7.3 percent, compared with a decrease of 2.7 percent.

Government spending kept Q2 GDP from being about 1.00 worse…Inventory added .18 to GDP. Goofy traded accounting added .58 to GDP due to the sizable decline in imports due to Fukushima. The lower imports subtracted only .23 from Q2 GDP. In Q1 they subtracted 1.35, a gain of 1.12 for Q2.

Ergo, without the big jump in defense spending, the Fukushima disaster, inventory gains and a .33 boost from a lower GDP deflator (2.39 vs. 2.72 in Q1), Q2 GDP would be solidly negative.

If the fraudulent CPI were used instead of the absurd GDP Deflator, Q1 and Q2 GDP would be negative .

The Employment Cost Index for Q2 is 0.7% (0.5% was expected) due to benefits (30% of compensation costs) jumping 1.3%, the biggest gain since June 2007.

For the past several months, the BLS’s fraudulent Birth/Death Model has manufactured about 140k jobs per month. Even with those bogus jobs, the past two employment reports have been ugly.

July is one of two months (January) in which the B/D Model deletes jobs. Last July, the B/D Model deleted 21k jobs. So there should be a negative swing of 150k jobs before seasonal adjusting in July NFP.

Ergo, there is a good chance that the July Employment Report could show a decline, instead of the expected 100k NFP jobs. Stocks would tank, but there could be a late Friday rally into Tuesday on the hope that the Fed would become friendlier toward QE 3.0 at the FOMC that occurs on Tuesday, Aug. 9.

 

Manufacturing in the U.S. almost stalled in July, threatening to deprive the two-year recovery of one of its main drivers.

The Institute for Supply Management’s factory index slumped to 50.9, the lowest since July 2009, from 55.3 a month earlier, the Tempe, Arizona-based group said today. Figures less than 50 signal contraction and the July index was lower than the most pessimistic forecast in a Bloomberg News survey.

Stocks declined and Treasuries rallied as orders shrank for the first time since June 2009, indicating production and economic growth may be limited. Other reports today indicated a global slowdown as factory measures from Asia to Europe dropped.

“Businesses have cut back on orders and employment because they are just not seeing the demand that they expected,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “The economy is just not picking up momentum in the second half.”

Business activity in the U.S. expanded at a slower pace in July, a sign manufacturing may be moderating after leading the economy recovery.

The Institute for Supply Management-Chicago Inc. said today its business barometer fell to 58.8 in July, lower than forecast, from 61.1 the prior month. Figures greater than 50 signal expansion.

Consumer spending in the U.S. unexpectedly dropped in June for the first time in almost two years as a slump in hiring caused households to retrench.

Purchases decreased 0.2 percent, after a 0.1 percent gain the prior month, Commerce Department figures showed today in Washington. The median estimate of 77 economists surveyed by Bloomberg News called for a 0.1 percent increase. Incomes grew at the slowest pace since November and the savings rate climbed.

Russian Prime Minister Vladimir Putin accused the United States Monday of living beyond its means "like a parasite" on the global economy and said dollar dominance was a threat to the financial markets.

"They are living beyond their means and shifting a part of the weight of their problems to the world economy," Putin told the pro-Kremlin youth group Nashi while touring its lakeside summer camp some five hours drive north of Moscow.

"They are living like parasites off the global economy and their monopoly of the dollar," Putin said at the open-air meeting with admiring young Russians in what looked like early campaigning before parliamentary and presidential polls.

 

The House Judiciary Committee approved legislation on Thursday that would require Internet service providers (ISPs) to collect and retain records about Internet users' activity.

CNET reported the bill would require ISPs to retain customers' names, addresses, phone numbers, credit card numbers, bank account numbers, and temporarily-assigned IP addresses for 12 months.

The bill passed by a vote of 19 to 10, and is aimed at helping law enforcement track down paedophiles.

"The bill is mislabelled," Rep. John Conyers (D-MI), a senior member of the panel told CNET. "This is not protecting children from Internet pornography. It's creating a database for everybody in this country for a lot of other purposes."

The Protecting Children from Internet Pornographers Act of 2011 (H.R. 1981) was sponsored by House Judiciary Committee Chairman Lamar Smith (R-TX) and Congresswoman Debbie Wasserman Schultz (D-FL)

“When investigators develop leads that might result in saving a child or apprehending a pedophile, their efforts should not be frustrated because vital records were destroyed simply because there was no requirement to retain them," Smith said Thursday.

"This bill requires ISPs to retain subscriber records, similar to records retained by telephone companies, to aid law enforcement officials in their fight against child sexual exploitation."

The American Civil Liberties Union and 29 other organizations sent a letter (PDF) to Rep. Smith on July 27, claiming that "any data retention mandate is a direct assault on bedrock privacy principles."

"The data retention mandate in this bill would treat every Internet user like a criminal and threaten the online privacy and free speech rights of every American, as lawmakers on both sides of the aisle have recognized," Senior Staff Attorney Kevin Bankston of the Electronic Frontier Foundation said.

"Requiring Internet companies to redesign and reconfigure their systems to facilitate government surveillance of Americans' expressive activities is simply un-American. Such a scheme would be as objectionable to our Founders as the requiring of licenses for printing presses or the banning of anonymous pamphlets."

The bill is supported by the National Center for Missing and Exploited Children, the National Center for Victims of Crime, the National Sheriff’s Association, the Major County Sheriff’s Association, the International Union of Police Associations and the Fraternal Order of Police.

 

Construction spending in the U.S. rose in June for a third consecutive month, led by a gain in nonresidential building, including factories, communications plants and commercial structures.

The 0.2 percent increase followed a revised 0.3 percent gain in May that was previously reported as a drop, Commerce Department figures showed today in Washington. The median estimate of economists in a Bloomberg News survey projected a 0.1 percent increase.

Lower interest rates, easier lending rules and a drop in raw-material costs may keep stimulating a rebound in commercial projects that will help underpin business investment, one of the few areas of the economy that contributed to growth last quarter. At the same time, decreases in government spending and a stagnant housing market probably mean a broad-based rebound in the industry will fail to take hold.

 

Chicago’s budget deficit for fiscal 2012 is projected to be $635.7 million, Mayor Rahm Emanuel said today, and could approach $800 million by 2014.

The gap is almost $50 million wider than the city’s estimate of $587 million when Emanuel became mayor of the nation’s third-largest city in May.

We have a structural problem, and the moment of truth has arrived,” Emanuel said at a City Hall news conference. “An economic recovery will not solve this problem for us.”

Chicago’s budget for the current year is $3.2 billion. Emanuel is scheduled to present his fiscal plan for 2012 in October.

The city has projected a budget deficit every year since 2001, reflecting a “structural” problem with city finances, he said. The mayor said that while he won’t reduce the city’s police force, he will seek work-rule change from employees. He again ruled out tax increases for people who “feel nickeled and dimed.”

“I can’t ask people to pay more into a system that needs fundamental restructuring,” he said.

AFSCME Council 31, which represents 4,000 city employees, said in a statement that Chicago “is at a crossroads” and that the union is ready to work with Emanuel, to a point.

 

HSBC Holdings Plc (HSBA), Europe’s largest bank, said it plans to cut 30,000 jobs by the end of 2013, about 10 percent of the total, to stem rising costs. The shares jumped.

The bank’s costs in relation to revenue rose to 57.5 percent in the first half, from 50.9 percent a year earlier, because of higher staff numbers, wage inflation and other costs, London-based HSBC said today in a statement. That’s above its target of 48 percent to 52 percent, it said.

“The market is likely to interpret the job cuts in a positive way,” said Neil Smith, a banking analyst at WestLB AG in London. “HSBC need to keep their costs under control.”

HSBC is cutting jobs and closing offices to reduce costs by as much as $3.5 billion over the next two years as it tackles wage inflation in faster-growing economies and prepares for stricter capital rules. The bank follows Credit Suisse Group AG, UBS AG, Bank of America Corp. and Goldman Sachs Group Inc. in eliminating roles as investment banking revenue declines. European banks have cut 230,000 jobs since the start of the financial crisis in 2007, according to Bloomberg data.

HSBC gained 4.5 percent to 621.4 pence by 10:44 a.m. in London, the biggest riser in the Bloomberg Europe 500 banks index, giving it a market value of about 111 billion pounds ($183 billion).