This Week in Economics: Jobless Claims

Jobless claims jumped, but remain well under 400,000!

Free to Choose: Part 5 Created Equal

Created Equal

Free to Choose: Part 4 From Cradle to the Grave

From Cradle to the Grave

Free to Choose: Part 3 Anatomy of a Crisis

Anatomy of a Crisis

Free to Choose: Part 2 The Tyranny of Control

The Tyranny of Control

Free to Choose: Part 1 The Power of the Free Market

The Power of the Market

Rick Santelli Sings A Stop Spending Christmas Carol!

A nice short Christmas/Economic song. Merry Christmas!

This Week in Economics: Jobless Claims and Third Quarter 2011 GDP

Jobless claims remain well under 400,000 and third quarter GDP falls under 2%.

If Congress Can Go On a One Month Break...

...I can take a couple of weeks off!

Common Sense Capitalism will be returning January 9th. In the meantime, check out our 500+ videos on YouTube, and join our Facebook fan page.

If you have any suggestions, you can comment here or on the other social network sites.

I hope you enjoy your holiday season!

Rick Santelli Vs Central Banks

Rick rails against central bank behavior.

What the 1998 Crisis and the 2008 Financial Crisis Have in Common

In 1997-98, Asia faced a currency and financial crisis. There were several different mechanisms involved, however, the end result was the fleeting of capital from most of the continent. In 1997, Thailand started having issues with its foreign exchange rate. The Thais practiced a fixed currency which required them to intervene in the foreign exchange marketplace if there was fluctuations in the currency. Thailand's constant intervention of its currency were causing strains on its reserves and in May 1997, they needed the help of Singapore to complete an exchange rate intervention.

On July 2, 1997, Thailand ran out of reserves. As a result, they had to let their currency float, which caused it to devalue by 20% overnight. In addition to this, banks in Asia had been exposed to lax lending practices and even worse, governments were encouraging and backing the financing of unprofitable real estate ventures (sound familiar?).

One of the differences between the '98 crisis and the '08 crisis is that the epicenter of the '98 crisis involved countries that fixed their exchange rates. The results of the Thailand devaluation was a wave of foreign exchange interventions and devaluations. In addition, financial institutions across Asia went bankrupt due to the lax lending policies.

To make matters worse, as the smaller countries devalued their currencies, the larger countries in Asia raised lending standards exponentially. In Hong Kong, the stock exchange and currency began to plummet together. Then, late in 1997, the crisis reached South Korea, the regions second largest economy.

As the currencies devalued, so did the values on finance companies' balance sheets. This further propagated the crisis. Eventually, the fears began to weigh on all global stock markets, including the United States where the Dow Jones lost over 500 points in one trading session. The IMF intervened and lent over $40 billion to Indonesia, and made similar to loans to Thailand and other countries in exchange for a tightening in lending policies and capital requirements.

By November, South Korea requested IMF aid as several Japanese brokerages began to strain and collapse. By the end of 1997, Russia started to have problems and the South Koreans needed IMF aid in order to make good on their short term government debt. On January 12, 1998, Asia's largest investment bank filed for liquidation bankruptcy.

South Korea eventually had to renegotiate some of its debts, and things in Indonesia became much worse. By the spring of 1998, the IMF had delayed aid because the government had failed to hold up its end of the austerity deal. When Indonesia cut enough to receive aid, protests flared in the country to the point that college students were shot and killed at Jakarta University and the President was forced to resign in May 1998.

By June of 1998, Japan had slipped into recession and Russia began seeing economic disruptions. By the next month, Russia had failed to secure the cash it needed (including trying to sell state owned assets) and ended up needing a loan from the IMF. By fall of '98, the bailouts spread the South America as the crisis goes global.

All of this started in Thailand and spread around the world in roughly 15 months.

Much of this should not only sound familiar to those who experienced the 2008 financial crisis, but those in Europe experiencing the 2011 European financial crisis. The Indonesian riots remind me of an amplified version of Greece, although the Greece austerity measures haven't reached their full potential yet.

The scary part about all of this is that if Thailand can trigger such a global event, what would happen if Greece or Italy default on their debts. Italy is larger than Russia was when it defaulted in 1998 and many analysts aren't sure if loans from the IMF (like in Russia) can stabilize the fiscal and economic situation.

Judging by the 1998 financial crisis, the 2008 financial crisis, and now the 2011 financial crisis, the world hasn't learned a single lesson.

Everybody's Getting Sued!

First, Jon Corzine, then former Fannie Mae and Freddie Mac executives.

What Supply and Demand Can Tell Us About the Euro Debt Crisis

The European debt crisis is an extremely complex situation facing the global economic community. Despite this complexity, a major part of the beginning of the crisis can be explained by supply and demand. The basic definition of supply and demand is that supply is the amount of a product that is available to the market, while demand is the amount of the product that the consumer wants. The intersection of supply and demand is price.

Supply

The supply side of the Euro debt scenario is simply the amount of debt European countries produce for the private market. In a recent article, the OECD warned of developing finance problems as the amount of debt produced by industrialized nations has nearly doubled since 2005 to $10.5 trillion.

The article notes:

"For the foreseeable future it will be a “great challenge” for a wide range of OECD countries to raise large volumes in the private markets, with so-called rollover risk a big problem for the stability of many governments and economies.

Rollover risk is the threat of a country not being able to refinance or rollover its debt, forcing it either to turn to the European Central Bank in the case of eurozone countries or to seek emergency bail-outs, which happened to Greece, Ireland and Portugal. The OECD says the gross borrowing needs of OECD governments is expected to reach $10.4 trillion in 2011 and will increase to $10.5 trillion next year – a $1 trillion increase on 2007 and almost twice as much as in 2005."

The "large volume" is amount of debt that these counties are creating. It was also interesting to see the EuroZone get singled out as a problem area when explaining the amounts of debt being issued. In the bond market, interest rates and prices move in the opposite direction. When prices fall, interest rates go up and vice versa. In terms of supply, this glut of supply in the bond market lowers prices, which raises interest rates.

Demand

With respect to demand, in order to successfully sell government debt, there needs to be an adequate demand from private financial institutions. In the United States, demand is supported by hundreds of billions (if not trillions) of dollars of purchases from the Federal Reserve Bank. In strong Euro countries like Germany, investors flock to German bonds for safety when economic times are rough, so early on in a recession, demand tends to drive interest rates down.

The problem comes after years of sluggish or no economic growth, when financial institutions and those funding governments see little or no growth in their wealth. When this happens, the amount of government deficits (supply) that the private markets can afford to buy actually decreases. Eventually, the prices have to fall to attract buyers and rates rise.

What we are seeing in Europe is a combination of supply side and demand side pushing of prices, and hence interest rates. Private institutions, lacking the increases of wealth are less able to buy government debt. Meanwhile, governments are flooding the world with debt, unbeknownst to them of the market mechanisms which moves their prices.

Something has to give on either side of equation for this crisis to end.

The MF Global Post Mortem: Balance Sheet Shows Why Customer Money is Missing

I hit the Edgar database to take a quick look at the MF Global financials. I was looking for anything that would hint to the shortfall in customers funds. The sad part of my analysis is that it seems to be completely obvious as to why customers are having a shortfall- the company did not designate enough reserve funds to cover what they owed to customers.

On the balance sheet, MF Global has a restricted cash account. Usually, restricted cash accounts are used for specific liabilities. In the case of MF Global, the restricted cash account was used to pay back money owed to dealers and customers. In the 2010 MF Global 10-K, (fiscal year ending Mar 31, 2011) which Jon corzine signed as CEO, MF Global had a combined $12 billion in cash and restricted cash ($11.3 billion in restricted cash).

In the liabilities of the 10-K, MF owed $14.6 billion in liabilities to customers and dealers ($13.5 of which to customers). Clearly, the company did not have the cash to reimburse all of its counter-parties in the event of a sudden bankruptcy. While the numbers suggest a $2.6 billion gap, it would make sense that the company has the ability to sell some of the current assets (securities) on its balance sheet to cover that gap.

In early August, MF Global filed its first quarterly 10-Q for the period ending June 30, 2011, their last filing and four months before their bankruptcy. In this report, cash and restricted cash equaled $11.6 billion while liabilities to customers and dealers was $15.2 billion. The shortfall grew to $3.6 billion.

In addition to the increase in shortfall between cash available and customer liabilities, the company began buying securities that it was to resell, some of which that it was going to buy back in the future. The company committed $2.5 billion to this activity in the first quarter of 2011 (Apr 1 to Jun 30).

The sad part of all this is that MF Global filed this information under the noses of multiple regulators. Once again, the SEC did nothing to flag this problem and Frank-Dodd was even less proactive. This leaves an important question for this industry, where else is this going on?

The other question is that if Jon Corzine is not charged with a crime, what's the usefullness of Sarbanes-Oxley?

This Week in Economics: Jobless Claims, CPI, and PPI

Jobless claims fell to a 3-1/2 year low and CPI and PPI dropped as well.

How the MF Global Bankruptcy is Affecting Corn Prices and Farmers

A couple of good videos discussing the ripple effects of the MF Global bankruptcy.

Responding to the Obama Campaign: Consumer Protection

Recently, the Obama campaign posted a snippet on the President's views regarding consumer protection:

I watched,

And I responded:

"We need the government to tell us what products we can and cannot use. We need the government to approve medications before ourselves or our doctors can determine whether or not they are safe or appropriate for us. I guess we cannot think for ourselves."

What Higher Interest Rates Means for the US Interest on Debt Expense

The above chart represent the interest expenses on our national debt estimated in all three of President Obama's budgets. Currently, we have paying a little more than $400 billion per year. However, according to the White House, interest on the debt is expected to exceed $1.2 trillion by 2020, triple what it was in 2009.

The reason is two-fold. One, America will have trillions more in debt by 2020 (approximately $6 trillion) and secondly, interest rates are expected to be higher by that time. Now, you'll notice that the more recent budget shows a dip in the estimated interest expense over the past few years. This is because interest rates have stayed lower than expectations since 2009.

Markets tend to have lower interest rates during recessions. Does the fact that interest rates are lower than they were in 2009 reflect the difference in the OMB's expectations of the economy and its outcome?

According to the Obama Administration's economic assumptions spreadsheet, the estimated interest rate on long-term Treasury bills is 5.3% and 4% on short term Treasury bills. If a debt situation similar to the one in Italy were to unfold in the United States, the interest expense amount could easily exceed $2 trillion per year. That's an $800 billion increase per year of the deficit for a country that would already have trouble borrowing funds.

So, how quickly do we need to get our act together?

Responding to the Obama Campaign: 'Give Everyone a Fair Shot'

Recently, I watched the below video entitled "Giving Everyone a Fair Share." Below is the video with my response.



My response:

According to your chart, middle class wages have only gone up 35% in the past 31 years. According to the Social Security Administration, they've gone up close to 250%. That's one disparity I would like an answer on. Additionally, this video is entitled giving everyone a fair shot. Last time I checked, anyone in the United States can get in the 'top 1%' as long as they exercise their intelligence and work hard. Let's not confuse equal opportunity with equal outcome.

Obama's Budget Shows His Failure to Create Jobs

The above chart represents the past three budgets covering the income security expenses in the federal budget. In Obama's first budget, it was clear that he expected the job market to be completed recovered by 2012. From there, the budget assumes growth in cost based on inflation.

In FY 2011, these estimates soared. Why would the cost of income security rise so much unless...the number of unemployed persons were higher than expected. Looks like that stimulus really had the outcome that the Obama administration expected?

Jon Corzine Testifies Before Congress

I've uploaded several videos of last week's Jon Corzine testimony before Congress.

Jamie Dimon Rants: Stop Bashing the Rich

Jamie Dimon has had enough of the populist anger!

This Week in Europe: Debt Crisis Rolls On

Some videos this week on Europe and the Euro debt crisis.

This Week in Economics: Jobless Claims

Jobless claims drop to a 9 month low.

Response to the Obama Campaign: Wall Street Reform

Another video posted by the campaign and in this one, they claim to have ended too big to fail and saved our economy from future crisis.

I responded:

"Wait, wait, wait! Where was the SEC when this whole mess happened? So, since one federal agency failed, we're going to create and PAY FOR ANOTHER ONE to do what they were supposed to be doing? How about this, tell Americans to buy homes on fixed interest rates, tell Americans to buy homes where the mortgage payment doesn't exceed 27% of their income. It's a lot cheaper than taking an old rusty building (the SEC) and trying to build a shiny gold one on top of it with my money."

Response to the Obama Campaign: America 50 Years From Now

An interesting video that talks about 50 years ago and 50 years from now:

And I responded:

"I HOPE the United States fifty years from now has some individual accountability left. Look 50 years back, in FY1962, the federal government spent $106 billion. Today, the government spends roughly 35 times more. If I told you government spending in 50 years was close to $100 trillion per year, would you be proud of our country?"

Euro Crisis: French and German Fiscal Plan is Ambitious

Markets have been rebounding for the past week on news that the leadership in the European Union have come close to a bailout plan for the troubled countries of Greece, Spain, and Italy. The political leadership, on Monday, announced plans for a treaty that would bring the EU closer to a fiscal union, limiting each country's annual deficit to 3 percent of GDP.

The leaders will include "automatic sanctions" against countries that violate the debt rules. There is no indication this early on, if any of the EU countries (besides France and Germany) will sign on or refuse this new treaty proposal. The main challenge will be the population in each of these countries supporting austerity measures.

Popular Support

While politicians may agree with the measures laid out in the treaty proposal, civilians of the governments in crisis may be less obliged. As we've seen in Greece, entrenched entitlement spending is the most difficult line item to pull away from a budget. Unfortunately, it is also the worst funded. Many countries may deal with citizens who do not want to lose their "benefits," but also at the same time, not pay for them. Governments sympathetic to these cuts may find themselves challenged or voted out by more hard line elements that will challenge EU membership.

Is 3% of GDP Enough?

There isn't a clear indication from the private markets that 3% of GDP is a manageable deficit. I believe, that in order for that to be true, countries have to grow by at least 3% each year. Europe is currently heading towards recession, which means that even with balanced budgets, some debt to GDP ratios are going to continue to rise.

Additionally, the factors of supply and demand weigh silently huge to this outcome. If the private market is over-saturated with debt, it isn't going to accept anymore, no matter what the quantities are. Additionally, if the recent rise in interest rates does enough financial damage, institutions may be less willing to purchase government bonds in the future. This would permanently lower the demand side of the equation.

If supply and/or demand are negatively altered, then these measures may not be enough from stopping a further crisis in the immediate future.

Hope on the ECB

It is becoming more widely accepted that the ECB will need to step in and buy Euro government bonds. These purchases, similar to Quantitative Easing in the United States, will be designed to ease interest rates. Unfortunately, like QE, these types of purchases lower the incentives of EU countries to be fiscally responsible. Additionally, they run both the risks of future inflation and angering the responsible nations who were responsible, yet had to watch their counterparts be rewarded for failure (similar to what Ford had to witness when GM and Chrysler were bailed out).

The ECB can (and likely will) get around this solution by buying an equal purchase of bonds in all 17 euro countries. This will equally lower rates in each of the member countries and allow for political stability to be more attainable. Unfortunately, it still does not solve the fiscal responsibility problem that it poses.

For more on the Euro Debt Crisis, check out our new Euro Debt Crisis Live section.

Response to President Obama: Our Young People Care

Another video in today's Obama file talks about how young people care about America's outcome.

I watched:

And I responded:

As a young person, I agree with you Mr.President, we do care about our country. I'm concerned about being forced to pay a percentage of my income to be reallocated to seniors (Social Security) when no such protection is going to be afforded to me when I'm a senior. I'm concerned that your own budget office expects government spending as a % of GDP to go from 25% to 33% by the end of the decade (and that assumes 4% GDP growth). I've looked at the FACTS Mr. President, and we can't afford 4 more years.

CSC Prediction: Coordinated Liquidity Easements by World Banks to Prelude Coordinated Debt Purchases, QE3

Get the printing press ready!

Last week, the Federal Reserve joined all major central banks in the world to ease liquidity restrictions on banking facilities in an effort to ease credit markets from the strain caused by the European debt crisis. This was on the heels of Monday's report that large French businesses had to seek credit from China and Japan, and that European banks had stopped lending to each other.

Unfortunately, this appears as if it won't be enough to stem the coming crisis. There is too much supply of government debt in Europe (like the U.S. housing market in 2007) and the demand for that debt is dropping precipitously. This is causing bond prices to fall, banks to take writeoffs, and a vicious cycle of deflation feeding itself.

The only immediate term solution I see besides balanced budget austerity is a coordinated purchase of government debt by the same Central Banks that participated in the liquidity restriction easements. The reason that Central Banks act in coordination is to avoid disruption in the global currency markets which can cause their own liquidity problems.

Basically, what all the central banks are doing is devaluing their currency at the same time, to make the transition (ie money printing) more smooth. Their hopes are that the credit markets will unfreeze, allowing for businesses to operate normally, and economies to grow.

I want to delineate that I AM NOT advocating this move, but predicting it. I believe a true solution to this crisis is for all Euro-dominated governments to balance their budgets with elevated interest expenses on their debts included. Then, as rates, calm, these governments will turn surpluses based on the difference between the elevated interest expenses and the actual results. That surplus can be applied to the national debt, reducing it, and beginning a cycle of responsible fiscal actions.

Unfortunately, that solution makes too much sense for politicians to implement.

This Week in Europe: Debt Crisis Over?

Some scenes from this week's European markets. We are working on an interactive European debt section to be completed shortly.

This Week in Economics: Jobless Claims and Unemployment Report

Jobless claims are back over 400,000 and the 'unemployment rate' is 8.6%.

My Response to the Obama Campaign: One on One Communication

Here's the video I watched:

And here's the response I posted:

"How about one on one conversations with taxpayers who have legitimate concerns about our economy or concerns about the size and role of government in our everyday lives? Unfortunately, those people have to pay the re-election campaign to be included!"

If you like the response, please stop by and like it, along with sending your own thoughts in regards to this issue directly.

My Response to Barack Obama: Job Creation

I'm beginning a series on comments I've made on YouTube regarding videos from President Obama and his campaign. The first video I commented on was:

And I responded:

"I'm fighting for jobs too, but not with the use and abuse of our tax dollars. We are running a $1.5 trillion deficit with a $15 trillion debt. If we keep up those numbers, 9% unemployment will look like the glory days."

You can check out more videos at the link below and feel free to either reply to my comments or comment on other videos.

http://www.youtube.com/user/BarackObamadotcom