Is the Fed Broke?

In certain circles, it is generally assumed that the Federal Reserve is broke. As in, Citi broke or Lehman Brothers broke. You look at what they've taken as collateral, or the ABS that they've taken on their books in exchange for Treasuries, and you have to wonder . . .

Anyway, here is an article about the subject in a relatively mainstream outlet:

http://www.thebigmoney.com/articles/judgments/2009/08/25/next-credit-bubble-now

No wonder they don't want to be audited.

Stimulus

What annoys me the most about the stimulus efforts is the lack of focus. I would have been much happier if the bulk of the money had been spent on a national project, something enduring and which would propel the nation into the 21st or 22nd century. Instead, all the craptacular pet pork projects have reified our national status as a 20th century giant. Alas, time passes by, drowning some, sweeping others along. America stays put while Scandinavia, China, India, and South Korea project their nations into the future.

China has the world's only carbon-positive city (or should that be carbon-negative?). Americans could trade a Buick for a Hummer. India fits its trucks with natural gas engines. America can't get high speed rail. Finland is wireless; Comcast offered me a landline. New Zealand cut taxes while my country can't reform health care because of counter-propaganda lies about death panels.

The stimulus and the bailouts, on top of the Social Security and Medicare demographic time bombs, have made it impossible for the nation to position itself as the leader of the 21st century. Unless we all agree to have our taxes raised . . .

Pimco's El-Arian on the Dollar

El-Arian speaks, at last. Not that he was holding his tongue or anything, but his inflation expectations remain steady. Key points of the article:

• Inflation is coming, and it is necessary,
• Which means a weaker dollar,
• And more stimulus has hit the states than most people expect.

I take issue with the third point. There's a whole lot more stimulus coming. States' utilization of federal money is basically minimal. They're acting like they don't know there's free money for the taking. Yet at the same time, his statement is fact-driven, I assume. This means that next week or the week after we'll start hearing about the liquidity trap again.

How many decades are we prepared to lose?

Checking My Words

I like to periodically check on my predictions. Otherwise, what's the point of making them?

From July 6:
1. Unemployment will be revised upward any day now to about 9.7%. Well, Cash 4 Clunkers plus the Census temps have put a momentary stop on the downward slide. No real jobs have been made, though. Layoffs are driving the stock market spike. Good stuff, right?
2. The political masses will call for a second stimulus. (Biden is already greasing the wheels) Again, the surprising success of Cash 4 Clunkers has delayed further calls for the second stimulus. Or, in the alternative, Cash 4 Clunkers IS the second stimulus. In which case, we're in deep fiscal trouble.
3. Borrowing rates to support the stimulus will reach critical levels as investors demand a greater risk premium than the USG is prepared to offer. As I've covered recently, there is a lot of pressure on government bonds. Only the extreme bears and the politically entangled are touching them.
4. Fed loses credibility as it suddenly buys up Treasury debt to make up for weak demand. I like how the press is reporting that the Fed is winding down recovery programs related to debt purchases when in fact they are extending them for an additional month. How this distortion happens is beyond my comprehension.
5. Inflation chicken littles (myself included) and bond vigilantes (Gross, et al.) will issue even more dire warnings about fiscal projections. Yesterday's investor pages were littered with discussion about soaring interest rates in the near term (2011). I'm still waiting on the next play by Gross and El-Arian -- any day now.
6. Stock market volatility (as measured by the VIX) will be back to 2008 levels. VIX insanity!
7. Oil producing nations, Russia in particular (especially as it faces the threat of bond default again), will slash production. The resultant price of crude will keep recovery forecasts for the US economy pessimistic. Inventories are high everywhere, but so-called speculators are still bullish on crude, thus delaying threats of production reduction. Russia is in trouble, though. They may threaten a reduction just to drive oil up past $100/barrel. How else are they going to prop their banks?
8. Even CNBC will talk about the liquidity trap. Simply, the threat of inflation is not enough to get sideline money back in the game because there is still too much fear. Cramer says CITI is a must buy. Infer what you want about that tidbit, but inflation talk will creep up again, especially when the pro forma October pullback comes and the Fed is forced to buy crates of government bonds to support another round of bailouts and stimulus.

Bond Pressure

The last big auction was a big success, driven by TARP banks' willingness to play nice and purchase a bunch of Treasury debt at underperforming yields. But it looks like the market is speaking again:

http://www.ft.com/cms/s/0/6f48312a-85cd-11de-98de-00144feabdc0.html

My Problem with Krugman

He's smart. He's articulate. He writes well. He's got a great beard.

But why do I think he's wrong about debt spending and a Keynesian solution to the economic crisis?

In simple terms, the Keynesian approach during the Great Depression failed. After all of our competitors were destroyed, of course the US economy -- in relative terms -- skyrocketed. If a busload of Olympic swimmers gets in to a horrific wreck, and only one escapes serious injury, you know he's going to win the next race.

The second reason his prescriptions scare me is because there has been very little stimulus spending to this date. Great volumes of taxpayer lucre were shoveled into the banks, but the big guys didn't even need it. Of the big banks, only BoA and Citi actually needed a bona fide bailout. Maybe Wells Fargo, too -- but maybe Wells isn't too big to fail. Of the ARRA, though, only a miniscule fraction of the allotment has been sent out to do anything in mainstreet.

So, what is the cause of the rally since March?

Value seeking, investor boredom, stronger-than-expected dollar, illusions of recovery in China. In this preceding list, where is the domestic stimulus?

Cash for Clunkers Saved the Day?

It appears that my irritation and panic over jobs was a result of underestimating Americans' desire to buy cars. Good work, President Obama. But, uh, what are you going to do to save autumn from a collapse? America, where citizens get paid to shop.

How It Begins?

For those of you who know my outlook on the country, you might recognize this story as one of the indicators of the beginning of the national dissolution. The problem is not the imposition of Federal troops on state jurisdiction, but rather the fiscal failure of a locality to defend itself from its own citizens. Meanwhile, we fight two foreign wars, occupy bases all around the world to protect our trading partners from the Soviets, and pay our citizens to shop. It would be nice to blame someone, but we're all in it now.