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oldsport

A E P Says U S Economy Is Fixed

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Tumbling government deficit and household debt together with a booming economy.

I've not been following what's happening over there for a long time. So, is it all as rosy as he says?

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10783568/America-has-conquered-its-debt-crisis-with-incredible-speed.html

Americans are purging their excesses one by one. Spending by the US Federal government has seen the steepest drop as share of national income since demobilisation after the Second World War.

Claims that President Barack Obama is bankrupting America with a lurch towards hard-Left statism are for tabloid consumption only. Outlays have fallen from 24.4pc to 20.6pc of GDP in five years. Spending is roughly in line with its 40-year average. This fiscal squeeze has been achieved without driving the economy into recession or a Lost Decade, a remarkable feat.

The US Congressional Budget Office expects the budget deficit to drop to 2.8pc of GDP this year, and 2.6pc next year. This is about the same as the eurozone but with a huge difference. The US economy is expanding fast enough to outgrow its debts.

The US energy revolution is of course half the story. It has stoked booms across the Dakotas, Wyoming, Nebraska, Washington, Oregon, Utah and Texas.

Francisco Blanch, from Bank of America, estimates that shale gas and oil have given the US economy an extra tailwind worth 1.9pc of GDP - what he calls the "energy carry" - with effects rippling through the chemical and plastics industries. New investments in ammonia plants are rising at an exponential rate, thanks to natural gas prices that are $4.40 (per BTU) in the US and $15 on Asia's spot market.

The US transferred more than $3 trillion to oil exporters from 2001 to 2008. That chapter is closed. The US is back to where it was in 2000 with an energy deficit well below 2pc of GDP and improving every month, while the eurozone is at -4.4pc and getting worse, and Japan is at -6.3pc.

The US has added 2.5m barrels a day of crude output over the last three years, almost as much as the next three countries combined. America covered a quarter of its oil needs in 2007. It covers well over half today. It has overtaken Russia to become the world's biggest exporter of refined petroleum products, and will soon be an exporter of liquefied natural gas aswell.

For more than half a century the US has been losing part of its industry with each recession. A study by the International Monetary Fund found that the pattern has been very different this time. Manufacturing has recovered quickly, led by machinery, computers and electronics. America's global share of manufacturing has stabilised at 20pc. China's share has also stabilised, at exactly the same level. The two superpowers are competing toe-to-toe for factory dominance. China is no longer gaining.

Yet the other half of the story is monetary stimulus a l'outrance - quantitative easing - to offset fiscal tightening and prevent a "pro-cyclical" downward spiral, which is what occurred when the European Central Bank jumped the gun and raised rates twice in 2011 before recovery was entrenched, setting off the catalysmic crisis that nearly destroyed EMU in mid-2012.

This is policy mix is no novelty. Britain pursued the same strategy with success after leaving the Gold Standard dollar-peg in 1931 and after leaving the ERM fixed system in 1992, and arguably again over the last five years though the jury is still out this time.

America's public debt has peaked at 72.3pc of GDP (bonds held by the public). The CBO expects the ratio to fall gently for the next three years. Such is the magic of the denominator effect. Economies do not have to cut debt in absolute terms to whittle away debt. The Romanian dictator Nicolae Ceaușescu thought otherwise and assiduously paid off Romania's debts just in time for his own execution in 1989. Those shaping eurozone policy today sometimes seem to be in thrall to this same atavistic belief.

Growth does the job so much faster. US household debt has plummeted from 98pc to 81pc of GDP in four years. The ratio of debt payments to disposable income fell to 9.9pc in March, the lowest since the Federal Reserve's modern data series began in 1980. Most mortgage debt is locked at fixed interest rates so this will not change fast when the Fed tightens in earnest

.

Charles Dumas from Lombard Street Research -- author of the America Phoenix in 2011, before it was fashionable -- says the mix of "soaring household wealth" and lower debt burdens leaves the US poised for a surge in consumer-led growth. He predicts a mini-boom, lasting until 2016.

The numbers of mortgages in negative equity have dropped to 19.4pc from 31.4pc two years ago, according to Zillow Real Estate Research. Over 4.8m households have been liberated. This is accelerating as US home prices claw back most of the 35pc drop from peak-to-trough.

Much of the debt has been cut by defaults, chiefly by home-owners throwing in their keys. You can do this in most US states, and rightly so. America's bankruptcy doctrines evolved with the injustices of colonial debt servitude still in the collective mind.

James Madison argued in the Federalist Papers before the American Revolution that treating debtors as criminals impeded risk-taking and commerce. A series of bankruptcy laws in the 19th Century gradually broke the lockhold of vested interests, levelling the playing field between debtors and creditors, with powerful effects on US economic dynamism.

Much of Europe still clings to late Medieval notions of debt sanctity, with laws to match, though a spate of suicides is forcing reform. In Spain the banks can sieze all your current and future assets if you cannot pay the mortgage -- which tend to happens when the jobless rate jumps from 8pc to 26pc -- adding the legal costs of foreclosure for good measure. Leaving aside the morality of state coercion to uphold the interests of creditors alone, this practice is inefficient. It blocks the cleansing process of boom-bust cycles, trapping economies in excess debt.

Data from the OECD shows that the varied effects of Europe's debt laws, contractionary policies, and a needless double-dip slump, led to jumps in public and private debt (non-financial) by 30pc of GDP in Spain, 33pc in Holland, 34pc in Italy, 51pc in France, 71pc in Portugal, and 151pc in Ireland, between 2008 and 2012. Europe harsh methods have been self-defeating even on their own terms.

It is true that bond yields have tumbled to record lows across the EMU debtor bloc this year but that is not in itself sustainable recovery. What these yields reflect is that EMU is close to deflation and unlikely to grow vigorously for a long time. German Bunds used to be the barometer of such macro-economic judgments. Club Med debt has become a proxy too now that German Chancellor Angela Merkel -- though not the German constitutional court -- has allowed the ECB to back-stop Italian and Spanish debt as a lender-of-last resort.

Five years after the Lehman crisis, US output is climbing to new peaks and unemployment is 6.7pc. Euroland has yet to regain its 2008 output, and the jobless rate is stuck at 12pc. Austerity is not the variable. The US fiscal squeeze has been just as draconian. "The difference is largely explained by relative monetary policies," said Mr Darda. The Fed kept nominal GDP on an even keel. The ECB did not.

You might say that QE is just a beggar-thy-neighbour policy by stealth, an allegation made by India's central bank governor Raghuram Rajan in a speech this month. The Fed fought back against China and the mercantilist powers by driving the dollar down to a tolerable level, and the US is now enjoying a devaluation windfall. Europe opted instead for a hard-euro policy regardless of circumstances, and has allowed the industrial core of Southern Europe hollowed out as a result.

America still has a lot of debt to clear. The errors of the pre-Lehman boom and the fifty year cycle of rising leverage that preceded it have left a debt burden comparable to the effects of a major war.

Yet predictions of inevitable American decline that had such resonance five years ago already look oddly dated, a misreading of underlying economic and geopolitical power. The concept of the BRICS no longer has any economic meaning. Brazil and Russia fell by the way side long ago. India is decades away from any real challenge. Only China counts.

History is full of such false declines. Informed opinion thought Britain finished after losing America, but it was actually France that was ruined by the costs of the Revolutionary War. Britain was just about to embark on its greatest days.

The Roman Empire seemed beyond saving by the start of the Second Century. It was instead the precursor of the Antonines, almost eighty years of stability and wealth. America's governing institutions still work remarkably well. There is no necessary reason why America cannot enjoy it own Antonine revival until the middle of this century.

Edited by oldsport

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History is full of such false declines. Informed opinion thought Britain finished after losing America, but it was actually France that was ruined by the costs of the Revolutionary War. Britain was just about to embark on its greatest days.

The Roman Empire seemed beyond saving by the start of the Second Century. It was instead the precursor of the Antonines, almost eighty years of stability and wealth.

There is no necessary reason why America cannot enjoy it own Antonine revival until the middle of this century.

Article in the telegraph.

UK election feel good factor alert.

Edited by billybong

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So the country that continues to print billions on a monthly basis and gift it to the financial mafia on wall street is in reality a booming land of milk and honey? Who knew?

America's governing institutions still work remarkably well.

It's who they work for that's the problem-but it's fair to say that the US has the best Governing Institutions that money can buy.

As to the housing recovery in the US;

New Home Sales Collapse To 8 Month Lows

New Home Sales collapsed 14.5% month-over-month to its lowest since July 2013. A mere 384k versus 450k expectations is thebiggest miss since July. So much for the Spring buying season... This is a 7 standard deviation miss against the smart economists' estimates! Whocouldanode that when the free-money sponsored fast money leaves the game that real people with real debt and real wages are simply priced out of buying a new home? Supply of unsold new homes jumps to 6 months, its highest since Oct 2011

http://www.zerohedge.com/news/2014-04-23/new-home-sales-collapse-9-month-lows

I love the way this guy makes the leap from from massive debt write downs to a thriving economy- as if the only thing that mattered was the ability to take on new debt. Somehow I'm reminded of the mythical roman vomitorium- only in this case it's not food but debt being explosively expelled in order to make room for another orgy of credit fueled 'growth'.

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It's fixed, in my opinion.

Didn't AEP recently get nudged from someone that QE wasn't a worry for hyperinflation risk (that he can smile about having proven QE doubters wrong), but one of causing preposterous inequality. Protecting values for the property VI.

Latest from the Doc... one of the very best housing blogs imo. http://www.doctorhousingbubble.com/

It seems like people have conveniently forgotten that since the housing crisis hit we have witnessed more than 7,000,000+ foreclosures. Do you think these people believe the Fed is almighty and can stop a speeding train or turn water into wine? Apparently some people forget that the Fed failed to prevent the tech bust or the housing bust in the first place. Now, the Fed is somehow the cult leader and the leader will not let housing values fall. The nation still has 9.1 million seriously underwater homeowners on top of the more than 7 million that have gone through foreclosure. It is abundantly clear that the mindless drivel of “buying is always a good decision” is just that. Investors are starting to pull back in expensive states because value is harder to find. I see the lemmings at open houses and you can see the drool at the side of their mouths hoping for a morsel of real estate.
Does buying today make sense?
... You have people staying miles away from stocks (which are up 170+ percent since 2009) yet are more than willing to stuff their entire $100,000 or $200,000 down payment into a highly priced piece of property that just went up by double-digits courtesy of investor fever. Yet they feel this is safer! California was a big chunk of the 7,000,000 foreclosures folks. You have people with pathetic 401ks and retirement funds yet 80 to 90 percent of their wealth tied up in one piece of real estate.
7 million foreclosures and currently 9.1 million seriously underwater home owners. It should be apparent that when it comes to buying a house, you really need to run the numbers. Investors have and they are pulling back from certain markets.

entry after entry.. earlier this April (not going to search back for the number I read the other day... very high percentage of renters in areas like Santa Monica - crazy SoCal prices/values). Older long term owners also benefiting from much lower annual property-taxes at least in Cali.

Starting in 2008 a large portion of housing sales started going to investors. These investors may have different timelines on when they will release property out into the market. In fact, this might be another big reason as to why so little inventory is out in the market. Some investors are looking to securitize cash flows and may be limited in terms of selling. Instead a regular buyer potentially looking to capitalize on equity and move up in more traditional times, you have different motivating factors. Since 2008 over 30 percent of all California home sales went to this group. Another group is baby boomers locked into their golden sarcophagus. This group from what I have found for the most part is house rich and cash poor. The notion that many will sell and cash in their lottery ticket is simply not happening in the market. Many are seeing kids move back home, many still have a desire to keep their place (even if it means living in an area gentrified by dual high income households/investors), and finally a large growing rental base. In essence the continuation of California becoming more feudal is still very much intact.

Forever HPI. Fortunes for those owning 25 years ago in SoCal. And oh for some opportunities of the past for savers. Some of these buyers of then probably generational wealthiest today. These days.. let us help you young people with getting the debt you need to pay hyperinflated prices, as we QE mind-boggling sums to lock in values.

SantaMonica-portadvert-1875.jpg

SantaMonica-1875.1.jpg

Investors gather to buy lots in the new "City on the Sea", 1875.

Edited by Venger

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comments posted.

It seems AEP ( for that is how he is referred) beleives debt is irrelevant.

He then justifies this by comparing it with the GDP.

Of course, if a part of an equation is irrelevant, then the equation is also irrelevant.

so comparing the total debt ( which is real) as a percentage of an irrelevant equation, is well...irrelevant.

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Where#s that list of headlines from the great depression...the one where year on year they told the people how it weas fixed and everything was going to egt better...the ultimately they said it was broken...went to war...millions died..then it was fixed.

Gulp. :blink:

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Love the Roman empire bit, it was beyond saving as the Western part eventually collapsed! The Antonines should be seen as a dead cat bounce.

That's exactly what I thought. Death throws of a dying power...thought I dont think America is there yet...Britain certainly is.

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comments posted.

It seems AEP ( for that is how he is referred) beleives debt is irrelevant.

He then justifies this by comparing it with the GDP.

Of course, if a part of an equation is irrelevant, then the equation is also irrelevant.

so comparing the total debt ( which is real) as a percentage of an irrelevant equation, is well...irrelevant.

Debt in your own money is irrelevant in the context of being able to print your own money.

QE to me is nicely circular in that respect. Why do we have a lot of debt ? Because we didn't pay the taxes we should have for the services we got. Who didn't ? Well, that would be the people who own all the debt. Who co-incidentally are getting really crap levels of interest as a results of QE.

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Debt in your own money is irrelevant in the context of being able to print your own money.

QE to me is nicely circular in that respect. Why do we have a lot of debt ? Because we didn't pay the taxes we should have for the services we got. Who didn't ? Well, that would be the people who own all the debt. Who co-incidentally are getting really crap levels of interest as a results of QE.

its not debt if its printed....well, there is no wealth to cover it, so it is unpayable. QE is therefore not debt.

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QE is dilution of wealth. The dilution of wealth that people shouldn't have in the first place.

the wealth isnt diluted...technically...the value of the unit chosen to represent it in the means of exchange is.

but, we have little or no inflation...apparently...so recipients of the new diluted money will have a beleif they are entitled to something that IS there....whereas, it isnt.

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the wealth isnt diluted...technically...the value of the unit chosen to represent it in the means of exchange is.

but, we have little or no inflation...apparently...so recipients of the new diluted money will have a beleif they are entitled to something that IS there....whereas, it isnt.

Yes I agree.

What they are entitled to and what they get are two different things.

QE is just a tax. An insidious one but a tax non the less.

This is what happens when people want endless services but aren't prepared to pay for them. They get politicians that come up with ever more elaborate methods of concealing the process of spending money and taxation. Ultimately we get (collectively) what we deserve.

In the US though I think they have it a lot better than here. There is clear wealth creation going on there (for example improvement in energy production) and there has been some clearout in certain markets. Whereas here it is more difficult to see what underpins "the recovery".

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the wealth isnt diluted...technically...the value of the unit chosen to represent it in the means of exchange is.

but, we have little or no inflation...apparently...so recipients of the new diluted money will have a beleif they are entitled to something that IS there....whereas, it isnt.

Depends what you're measuring. Consumer price inflation is negligible, commodity price inflation is modest, asset price inflation is soaring.

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AEP ... huh.

3108043-1337995318-Batma.jpg

http://www.theautomaticearth.com/debt-rattle-apr-23-2014-qe-is-a-fraud-perpetrated-by-made-men/

In essence, what central banks have done so far, first in Japan, then in the US and EU, is to cordon off the debts residing in their banks (e.g. in the form of swaps and not-so-securities), and then flood these same banks with money/credit, in order to make them look healthy. Since all these nations’ banks have the same debt issues, they all agreed to ignore each other’s obvious sleight of hand. And anyone can understand that if these banks are still sitting on huge amounts of debt, any and all stimulus must and will at some point disappear into a bottomless black hole, albeit only after first having pumped up asset markets to new bubble heights and creating a temporary and entirely false impression of growth and recovery, with one more round of fat profits for the zombified financial system, and eventually leaving behind an economic landscape for which the term scorched earth would be sheer flattery.

If one thing should be clear, it’s that this does nothing to either fight deflation, induce growth or launch a recovery. It paints rosy pictures on a shiny and alluring screen, behind which present and future generations are being robbed blind.

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Good article.

it just isnt true.

borrowing is up overall in the US...and its not private sector debt.

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Debt in your own money is irrelevant in the context of being able to print your own money.

QE to me is nicely circular in that respect. Why do we have a lot of debt ? Because we didn't pay the taxes we should have for the services we got. Who didn't ? Well, that would be the people who own all the debt. Who co-incidentally are getting really crap levels of interest as a results of QE.

But its not just savers who are harmed, is it.

Its anyone paid in sterling/dollars.

Their purchasing powers have been crippled over the last 6 years.

In what world is that 'irrelevant'

More debt(higher prices) when the money in your pocket is the same isnt irrelevant. Its a slow theft, certainly, nothing like the hyperinflation gold bugs might suggest, but its going backwards all the same.

Simply writing off the debt would be better. But we cant do that as our government now serve the interest of foreigners, not the citizenry.

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