Cash for Clunkers MASSIVELY distorts GDP number

In yet another straw man attempt to wish away the much needed economic 'correction' in the US, the US Bureau of Economic Analysis (BEA) is busy cooking their books and spinning straw into gold with the latest read on the US GDP number.

Predictably, Wall Street accepted this number without skepticism late last week and rallied, before coming to it's senses on Friday and giving back most of the gains.

In dissecting this news, it appears that the large uptick in GDP (and the lynchipin of the claim that the recession is officially over) came from the US Cash for Clunkers program, which many honest economists are referring to as a "sugar high". The remainder appears to have come from yet more government 'invisible hand' economics, homeowner tax credits- and more indirectly, lower borrowing rates which only serve to drive most Americans deeper into debt.

Barry Ritzholtz, chief markting officer for Ritzholtz Research interrupts the party by adding:

The 1st question to ask about GDP is the degree of inorganic/artificial gains. As the above paras suggest, much of the improvement is where the government is spending, incentivizing, or bailing out various sectors: Autos, Residential RE, and Fed spending.

Big GDP Number; 3.5%

Chart of the Day: Cash for Clunkers MASSIVELY distorts GDP

Gold hits record on Indian Purchase!

It is the biggest single central bank purchase of gold made public in over 30 years.

Between October 19 and October 30 the Reserve Bank of India purchased $7.5 billion worth of gold, 200 metric tonnes.

"This is a sea change in the gold market on the central bank front, the whole equation has changed from central banks over a decade or two you're counting them as sellers, and now we're starting say maybe central banks are going to be buyers," said the author of "Ages of Gold", Timothy Green.

"And in terms of a gold producing country like Australia and other places, that is a very significant change."

He says the global financial crisis has made central banks rethink how they store wealth and hedge against inflation.

"In the biggest economic upheaval that we've seen since the 1930s, the word nowadays is security."


Gold hits record on Indian Purchase

Real Estate Price Plunge makes Homeownership Perilous Path

“We always talk about homeownership as being the American dream, but during the last decade people forgot it’s shelter and started thinking of it as a fast way to make or lose money,” said Retsinas. “The quicker we move back to seeing real estate as a place to live, a place to put down roots, the quicker the housing recovery will strengthen.”

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The Greatest Theft in American History!

"That principle is: the US government is busy actively raising home prices. And there we are back to what I've been saying about Fannie and Freddie for the longest time. While the reason given by Washington is that its involvement is driven by a desire to "stabilize" the markets, that is at best only part of the truth. What the White House and Capitol Hill are trying to do is "stabilizing" the markets at a level that they find acceptable. Which, if we recognize that their policies increase the number of homes on the market as well as their prices, evokes the image of a hamster on a flywheel. And that hamster WILL get tired at some point..."

"There is no better and easier way to rob people blind then to make them think you're doing them a favor. Giving them an $8000 credit on a home priced at $250,000, that without that credit would cost them no more than $100,000, will be preferred over the cheaper home. Hey, it's free money. Isn't it?"

The Greatest Theft in American History!

IRS Wrongly Gave Homebuyer Tax Credit to Resident Aliens, Minors: Watchdog

Anyone wondering why confidence in the US economy, or the ability of our policymakers to regulate it, should look no further than this piece.

Evidently, there is no time for fact checking when it comes to propping up deflating home values.

"As a result of the IRS’ decision to not implement the additional checks, George said, more than 19,300 electronically filed 2008 tax returns improperly claimed the tax credit for homes that had yet to be purchased at the time of the tax filing. He said more than $139m in erroneous claims were paid to these individuals."

IRS Wrongly Gave Homebuyer Tax Credit to Resident Aliens, Minors: Watchdog

American Pie and the Fourth Turning

Government debt as a percentage of GDP will reach 99% in 2019 versus 24% in 1974. The Paul Krugmans of the world will point out that Japan has a debt to GDP of 170% today and they are doing OK. What he won’t point out is that they have endured a two decade long recession and started it with the benefit of huge trade surpluses and personal savings rates exceeding 10% by consumers. The U.S. has neither of these attributes.

The good news is that we will never reach the $25 Trilion National Debt. The bad news is that the country will collapse well before 2019. As a gang of marauding starving homeless former Goldman Sachs investment bankers beat Mr. Krugman about the head with his Nobel Prize, he can try to explain to them how another trillion of stimulus would have done the trick. Every decision made by our “leaders” in the last year has been a short-term solution without worrying about future consequences. This has been the politicians’ response for decades. Amazingly, the people that inhabit the halls of Washington and live in the ivory towers of academia actually believe that debt will cure a disaster created by too much debt.

“The fact that an opinion has been widely held is no evidence whatever that it is not utterly absurd; indeed in view of the silliness of the majority of mankind, a widespread belief is more likely to be foolish than sensible.” -Bertrand Russell

American Pie and the Fourth Turning

US Debt purchases - a lesson in obscure mathematics

Great article here by Chris Martenson detailing the Fed's announcement to discontinue it's treasury purchases, and a look into who may fill the enormous void after the Fed is done gobbling up all this debt.

I am wondering exactly how all the necessary US government borrowing will happen without the Federal Reserves deep-pocketed assistance? This is not a small matter - if the US government suffers a funding accident (a.k.a. an 'auction failure'), it would be the financial equivalent of a 9.8 earthquake.

Comment: Indeed it would be, as long rates would have to rise SIGNIFICANTLY to entice foreigners back into the market for US debt. Such an instance is PRECISELY what the Fed was hoping to avoid by agreeing to buy this debt in the first place.

Consider that the primary sources of funds for extravagant Treasury purchases by China and Japan (et al.) in prior years were those countries' magnificent trade surpluses. Somehow, despite a global collapse in trade (does minus 30%-40% count as a 'collapse'?), the past 12 months have seen the highest ever foreign purchases of US Treasuries in history. And not just by a little bit, but by a lot...

...the truly spectacular inflows of foreign dollars into US Treasury paper cannot logically continue forever, especially given the collapse in export markets. There is even some mystery as to how they could have been as large as they've been.

Comment: Mystery? There seems to be a school of thought out there that is suggesting the secrecy behind the Fed's disclosure of bailout funds may reveal that the Fed has been providing foreign central banks with the money to purchase US debt. If this were the case, the alleged 'insatiable appetite' that foreigners have expressed for US debt could possible be exposed as little more than a massive money laundering scheme sponsored by the Fed to force / keep long rates low here in the US- and hence prolong accommodative monetary policy. This game works for a while, but eventually countries with large reserves of US dollars sitting in their vaults, grow uneasy with the idea that the issuing country is actually inflating away their debts and diluting the share price of US dollars. Calls for a new reserve currency grow louder with each stimulus package proposed.

Here's the full article by Chris Martenson