March 29, 2024

Geithner – “I am not a crook”

“Chinese assets are very safe”

This remarkable assertion regarding the safety of US debt securities held by China was made by Timothy Geithner, US Treasury Secretary, during his visit to China.   That Mr. Geithner felt compelled to make this statement probably reinforced the unease China has about the finances of the United States.  If the Chinese assets were actually “safe” and everyone knew it, there would have been no need to say that they were safe.

Mr. Geithner’s denial brings to mind another famous denial made by Richard  Nixon during the Watergate affair – “I am not a crook”.  We all know how that turned out.  If it wasn’t obvious that everyone knew Nixon was a crook, he would not have had to deny it.  If US assets are really safe, Geithner would not have to say that they are safe.

Almost a Vaudeville Act

Mr Geithner’s “Chinese assets are very safe” line was  greeted with loud laughter by the student audience he made his remark to.   The laughter speaks for itself regarding the credibility given to Mr. Geithner’s assurances.  Perhaps our Treasury Secretary should have countered the laughter by saying, “I am totally serious about this”.

At the same time, the President and Chairman of the Federal Reserve were very publicly proclaiming that the US deficits would be cut, future spending would be “disciplined” and that fiscal imbalances would be addressed.  These remarks probably confused the Chinese as they watch the United States implement programs that require trillions of dollars a year of new deficit spending.  You can say you will do something but what really counts is what you actually do.   Words are a cheap commodity while confidence is precious.

The recent remarks by Geithner, Obama and Bernanke promising fiscal restraint may have something to do with the following chart.

10 Year Treasury

10 Year Treasury

Courtesy: Yahoo finance

Despite the Fed’s massive purchases of mortgage and treasury securities,  price action in the long term treasury market clearly indicates more sellers than buyers, with rates nearly doubling since late last December.  Rates at 3.75% on the 10 year treasury are certainly not a disaster, but if all the powers of the Fed and Treasury to lower interest rates are failing, then maybe things aren’t so “safe” after all.

Hyperinflation Worries – The Next Black Swan Or A Contrary Indicator?

Inflation Concerns Increase

There has been much speculation lately about the end results of the US Government’s massive deficit spending.   Many analysts are predicting that the end result will be hyperinflation as the Fed is forced to monetize debt that the US Government is unable to borrow in the credit markets.  These concerns have already turned to reality as rates on the 10 year Government have increased sharply from approximately 2% to 3.5% since the start of the year

Always quick to response with a new product to meet investor demand, Wall Street has come up with a product to protect investors from the risk of hyperinflation.

Wall Street Journal – A hedge fund firm that reaped huge rewards betting against the market last year is about to open a fund premised on another wager: that the massive stimulus efforts of global governments will lead to hyperinflation.

The firm, Universa Investments L.P., is known for its ties to gloomy investor Nassim Nicholas Taleb, author of the 2007 bestseller “The Black Swan,” which describes the impact of extreme events on the world and financial markets.

Funds run by Universa, which is managed and owned by Mr. Taleb’s long-time collaborator Mark Spitznagel, last year gained more than 100% thanks to its bearish bets.

Unlike last year’s sudden market implosion, inflation isn’t an unimaginable event that few currently anticipate. In fact, many fear inflation right now amid government efforts to goose the economy. Universa’s bet, however, is that inflation will reach levels few expect.

The fund will also bet against Treasury bonds, which tend to weaken in inflationary environments. Last week, Treasury yields shot to their highest level since November as prices fell on inflation concerns. Oil topped $66 a barrel. Gold is creeping nearing $1,000 an ounce.

Also, some investors are worried not about inflation but about deflation and its pernicious effects were the economy to remain stalled.

David Rosenberg, chief economist at Gluskin Sheff, a Toronto wealth-management firm, believes inflation won’t take hold until consumer spending rebounds, which he thinks could take years.

Mr. Taleb said any deflation would be matched by an aggressive move by governments to stimulate their economies, leading inevitably to an uncontrollable surge in prices.

Deflation Vs. Inflation

The emergence of Wall Street products to protect against hyperinflation may, in fact, be a contrary indicator.  Many times in the past, eager buyers have rushed into investments pushed by Wall Street as a trend was nearing its peak.

Washington’s massive deficit spending and the lack of fiscal discipline it represents will no doubt end badly.   At this point, however, stimulus spending, bailouts, guarantees and deficits have done nothing to reverse the decline in real estate values, corporate profits, consumer spending and consumer incomes.  Events of the recent past have shown how quickly the country’s finances can change, but deflation rather than inflation seems to be today’s enemy.  The rampant price cutting and decreasing incomes that we observe today are not the classic ingredients of inflation.

The event that may mark the tipping point into hyperinflation is how the Federal Government responds to the deficit crisis facing virtually every State in the country.  Discussing the perils of a federal bailout of California, Peter Schiff recently noted that :

However, if Obama comes to the rescue, none of the needed cuts will be made. Instead, California will continue to operate its bloated bureaucracy and will be in constant need of more bailouts. In other words, if Schwarzenegger gets his bailout, look for him to utter his famous line – “I’ll be back.”

But it’s not just Schwarzenegger who will be back, but governors from all the other states as well. After all, if the Federal government bails out California, by what right can they deny similar aid to other states? The bailout will send a clear message that states do not need to cut spending.

The need to make good on state and federal obligations will further depress the appeal of all U.S. dollar-denominated debt. As a result, as real buyers flee the market, the Fed will have to run its printing presses even faster to pick up the slack. This will set into motion a self-perpetuating spiral of money printing and Treasury sales with a predictable result: hyperinflation.

Should we reach the point where the Federal Government winds up bailing out virtually every State in the United States, we will have reached the point of total financial absurdity.   As I have previously pointed out, “The United States is not an abstract construction with a separate economic destiny,  immune to events in the rest of the nation.  The United States are 50 States joined as one.  If nearly every one of the 50 states is an economic train wreck, the conclusion for Uncle Sam  is obvious.”

If the Federal Government adds the States to the bailout list, Universa’s hyperinflation fund will have more customers than it can handle.

Mortgage Rates Skyrocket As Fed’s Rate Manipulation Fails

Markets Will Ultimately Determine Long Term Interest Rates

Treasuries continued their sell off today as the yield on the 10 year benchmark bond climbed to 3.72%, a stunning increase from the recent lows just over 2% in late 2008.  Investors have become concerned that record amount of debt sales and quantitative easing by the Treasury that may lead to inflation.

10 Year Treasury

10 Year Treasury

Courtesy Yahoo Finance

Further contributing to the huge bond selloff today were comments by Marc Faber that the US might enter “hyperinflation” based on the Fed’s super low rate policy, huge increases in government debt and massive liquidity injections into the banking system.

Mortgage Rates Explode Upward

The yield on the 10 year bond has been climbing since early January, gradually putting pressure on mortgage rates.  Until recently mortgage rates did not jump dramatically since the spread between the 30 year fixed rate mortgage and the 10 year treasury narrowed.

Some analysts have speculated that the  Fed was able to manipulate mortgage rates lower over the short term through purchases of mortgage backed securities.  Today, the Fed discovered the limits of  establishing artificial price points.  The Fed may be able to manipulate rates in the short term, but the markets will ultimately set the price of money based on the reality of  US financial conditions.

Bloomberg – The difference between yields on Fannie Mae’s current- coupon 30-year fixed-rate mortgage bonds and 10-year Treasuries had been narrowing. It was at 0.92 percentage point today, down from as high as 2.38 percentage points in March 2008, according to Bloomberg data. The Fed’s purchases drove the spread to 0.70 percentage point, the lowest since 1992, on May 22. The yield gap jumped from 0.71 percentage point yesterday.

“Many investors who felt MBS spreads were too tight thought it might be time to take chips off the table,” Credit Suisse’s Swaminathan said. “This is something we anticipated would build up” as many mortgage-bond holders who were previously wary of lightening their positions on the view the Fed buying would continue to support the market finally decided to act.

“The last two months have been quite abnormal” as mortgage rates generally held in a range between 4.5 percent and 4.75 percent even while Treasury yields began climbing, he said.

Today, the “abnormal” pricing situation was shredded.  Major banks sent out multiple mortgage rate increase notices as the day progressed.  Here’s an example of how mortgage rates have increased with one large bank over the past couple of days.

Mortgage Rates In The 4% Range Disappear

On Thursday, May 21st, a prime mortgage borrower could have obtained a 30 year fixed rate of 4.75% with a half point fee.  On May 27, the equivalent rate for a prime borrower is 5.375% with a half point fee.

To obtain the 4.75% rate today, a borrower would need to pay approximately $5,400 on a $250,000 loan to buy the 4.75% rate.  The monthly payment difference on a $250,000 mortgage loan at 5.375% vs. 4.75% amounts to $96 or $1152 per year.

Are 6% 30 Year Fixed Rate Mortgages Coming Soon?

So much for Mr. Bernanke’s grand experiment of buying mortgage debt with printed money.  If the spread between mortgage bonds and the 10 year treasury widen to the spread of 238 basis points seen in March 2008, the 30 year mortgage rate will be over 6%,  even if the 10 year treasury remains at 3.72%.

California’s Crash Omen of Nation’s Future

Borrow and Spend = Crash and Burnbig bag of indeterminate money

California has always been the trend setter for the nation but never more so than today as it totters on the edge of insolvency.  The theory that States or Nations cannot go bankrupt due to their unlimited taxing powers has reached its limits as California voters have resoundingly rejected further tax increases.  Without a Federal bailout, the State of California will be forced to make massive budget cuts.  The illusion of a free lunch, paid for with borrowed money is now replaced by the harsh reality of a mortgaged future.

California may be in the spotlight today as the first major state to collapse financially, but most of the Nation’s other 49 states are not far behind.  Tax revenues have declined in 45 other states by almost 13% in the first quarter and are likely to continue declining as both corporate and personal incomes decline.  For the first time ever, the biggest source of revenue for the States is from the Federal Government.  Almost all 50 States are at the precipice.

Given the absolute financial disaster occurring in almost every State, how long can it be before the ability of the US Government to pay its debts is called into question?  The United States is not an abstract construction with a separate economic destiny,  immune to events in the rest of the nation.  The United States are 50 States joined as one.  If nearly every one of the 50 states is an economic train wreck, the conclusion for Uncle Sam  is obvious.  Can the whole be greater than the sum of its parts?

Numerous doubts are being aired daily about the credit rating of the United States.  Consider some comments from today:

Britain’s Debt Omen

For a warning about America’s fiscal future, consider yesterday’s news from Britain. United Kingdom stocks, bond futures and sterling all fell after Standard & Poor’s lowered the country’s credit outlook.

But in both the U.K. and U.S. today, the politicians in power equate government spending with growth. So on present course, Britain’s credit future could well be America’s in the coming years as U.S. spending soars.

Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone

Several policy missteps suggest that investors should stop trusting — and lending to — the U.S. government.

“All currencies are being debased dramatically by their central banks at extraordinary speeds and so in relative terms it appears there is no currency problem,”  In reality, however, paper money is highly vulnerable to a public catalyst that serves to acknowledge it is all merely vapor money.”

For the fiscal year ending Sept. 30, the Congressional Budget Office forecasts a record deficit of $1.75 trillion, almost four times the previous year’s $454.8 billion shortfall and about 13 percent of gross domestic product. Bear in mind that the target demanded of European nations wanting to join the euro was a deficit no greater than 3 percent of GDP.

David Walker, a former U.S. comptroller general, wrote in the Financial Times on May 12 that the U.S.’s top credit rating looks incompatible with “an accumulated negative net worth” of more than $11 trillion and “additional off-balance-sheet obligations” of $45 trillion. “One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate,” he wrote.

Flip-Flops and Governance

Mr. Obama campaigned on “responsible fiscal policies,” arguing in a speech on the Senate floor in 2006 that the “rising debt is a hidden domestic enemy.”

However, Mr. Obama’s fiscally conservative words are betrayed by his liberal actions. He offers an orgy of spending and a bacchanal of debt. His budget plans a 25% increase in the federal government’s share of the GDP, a doubling of the national debt in five years, and a near tripling of it in 10 years.

US Officials Vow Fiscal Vigilance

Treasury Secretary Geithner and President Obama both acknowledge that out of control spending could eventually lead to default, credit market rejection and a lower standard of living as the cost of debt servicing destroys our standard of living.

Geithner Pledges To Cut Deficit

May 21 (Bloomberg) — Treasury Secretary Timothy Geithner said the Obama administration is committed to reducing the federal budget deficit after concerns rose that the U.S. debt rating may eventually be threatened with a downgrade.  He added that the target is reducing the gap to 3 percent of gross domestic product or smaller, from a projected 12.9 percent this year.

– the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

Obama Says US Long-Term Debt Load “Unsustainable”

May 14 (Bloomberg) — President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

The Future Reality

The President and Treasury Secretary say what they have to say.  The reality is that the present course of unlimited credit expansion, quantitative easing, bailouts  and massive deficit spending will continue in an attempt to re-inflate asset values and stimulate spending.   The Government will not accept  alternatives that they view as being worse – deflation and a collapsing economy with civil unrest.  California will be bailed out like everyone else.

The course of action for long term wealth accumulation under the present circumstances seems obvious.   Avoid  an over concentration in paper assets (debt) that can be produced by governments in infinite quantity at zero cost.   Diversify into assets backed by 1) real services or goods that there will always be a demand for and 2) natural resources such as commodities, oil and gold.

America’s Triple A Credit Rating – At The Precipice?

Black Swan Events Becoming Routine

Our Nation has avoided the decline into the abyss that many have been predicting during the economic crisis.  At the cost of approximately $13 trillion in government bailouts and guarantees the system has been held together but at a very high cost that future generations will bear through higher taxes or a much lower standard of living.

Our “prosperity through debt financed spending” philosophy has deeply indebted every sector of the economy.   Our leaders implore us to borrow and spend.  The US budget deficit is projected to hit $2 trillion dollar this year and continue indefinitely.

What we cannot borrow, we can simply print in unlimited amounts, imperiously oblivious to the serious risks and consequences of such financial folly.  Logical minds reject these unsound theories and realize that every nation has financial limitations,  whether we like it or not.  The risk of default by the United States, once considered unthinkable, is now a topic of debate by serious minds.  Consider the following from The Financial Times.

America’s Triple A Rating Is At Risk

Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.

That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the Peoples Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.

The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case.

For too long, the US has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition. One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate. The credit rating agencies have been wildly wrong before, not least with mortgage-backed securities.

One way out of these problems is for the president and Congress to create a “fiscal future commission” where everything is on the table, including budget controls, entitlement programme reforms and tax increases.

Recent research conducted for the Peterson Foundation shows that 90 per cent of Americans want the federal government to put its own financial house in order. It also shows that the public supports the creation of a fiscal commission by a two-to-one margin. Yet Washington still sleeps, and it is clear that we cannot count on politicians to make tough transformational changes on multiple fronts using the regular legislative process. We have to act before we face a much larger economic crisis. Let’s not wait until a credit rating downgrade. The time for Washington to wake up is now.

Our Nation’s future is being risked by a ruling class that continues to refuse to tell us what we need to be told – I thought we were promised that it was time for a change?

More on this topic

Alarm Sounded on Social Security – The financial health of the Social Security system has eroded more sharply in the past year than at any time since the mid-1990s, according to a government forecast that ratchets up pressure on the Obama administration and Congress to stabilize the retirement system that keeps many older Americans out of poverty.

Tea Parties Draw Small Crowds – Are Taxes Too Low?

2009-04-15-hartford-tea-party-106 Hartford, CT Anti-Tax Rally

Anti-tax tea party rallies took place across the nation on tax day, April 15th.   All things considered, including the warm spring weather, the size of the crowds protesting seemed oddly small.

MSNBC -Whipped up by conservative commentators and bloggers, tens of thousands of protesters staged “tea parties” across the nation Wednesday to tap into the collective angst fueled by a bad economy

“Frankly, I’m mad as hell,” said businessman Doug Burnett at a rally at the Iowa Capitol, where many of the about 1,000 people wore red shirts declaring “revolution is brewing.” Burnett added: “This country has been on a spending spree for decades, a spending spree we can’t afford.”

In Boston, a few hundred protesters gathered on the Boston Common — a short distance from the original Tea Party — some dressed in Revolutionary garb and carrying signs that said “Barney Frank, Bernie Madoff: And the Difference Is?” and “D.C.: District of Communism.”

Tens of thousands nationwide,  1,000 in Iowa and only a few hundred in Boston, the site of the original Tea Party!  What gives?  Tens of thousands, in a nation of 300 million, is a statistical non event.

Who Cares, If You Are Not Taxed?

Did the small number of protesters indicate that people are not upset by taxes, or was it a case of  “why waste my time – nothing will change”?  Perhaps it was something else, such as the fact that a relatively small number of households pay virtually all of the individual income taxes collected.  Consider the following:

NEW YORK (CNNMoney.com)

The top fifth of households made 56% of pre-tax income in 2006 but paid 86% of all individual income tax revenue collected, according to the most recent data available from the Congressional Budget Office.

But once the various tax breaks to which they’re entitled are counted, the burdens of low- and middle-income tax filers as a group has been fairly low.

The Tax Policy Center estimates that for 2009, 43% of tax units (most of which are lower income households that may or may not file a return) will have no income tax liability or will have a negative income tax liability, meaning the government will actually pay them.

Wall Street Journal

The federal version of this spinning top is the tax code; the government collects its money almost entirely from the people at the narrow tip and then gives it to the people at the wider side. So long as the pyramid spins, the system can work. If it slows down enough, it falls.

It’s also what’s called redistribution of income, and it is getting out of hand.

A very small number of taxpayers — the 10% of the country that makes more than $92,400 a year — pay 72.4% of the nation’s income taxes. They’re the tip of the triangle that’s supporting virtually everyone and everything. Their burden keeps getting heavier.

As a result of the 2001 tax cuts enacted by a bipartisan Congress and signed by President George W. Bush, the share of taxes paid by the top 10% increased to 72.8% in 2005 from 67.8% in 2001, according to the latest data from the Congressional Budget Office (CBO).

According to the CBO, those who made less than $44,300 in 2001 — 60% of the country — paid a paltry 3.3% of all income taxes. By 2005, almost all of them were excused from paying any income tax. They paid less than 1% of the income tax burden.

It’s time to create an Economic Growth Code whose purpose is to fix and grow the economy, not redistribute massive amounts of wealth. A new tax code that creates growth and reforms our entitlement system is the only way to dig our way out of the hole we’re in.

Not only is the current code flawed from top to bottom, it is used by politicians to divide the public along class lines and fails to promote prosperity.

I’d also create a mechanism so tax rates go up or down for everyone — no more dividing the country by lowering taxes for some or raising them only for others. A revenue system whose purpose is to pay the government’s bills should apply fairly to one and all. If Congress wants to raise or cut taxes, it should do so for everyone.

Another benefit is that such a system will create an environment in which spending programs receive the scrutiny they deserve. It’s funny what happens when everyone pays the bills; Americans may want less spending so they can pay fewer bills.

Many Had No Reason To Protest

The stats on who actually pays taxes explains the low turnout of tax protesters.   If you are not paying taxes, which is the case for over 50% of the country’s wage earners, what do you have to protest?

Why the no show turnout for the 40% of workers who pay 30% of the taxes?   My guess is they probably couldn’t afford to take the day off.   And as for that exalted group in the top 10% of wage earners who pay 70% of the taxes, they were probably doing what got them into the top 10% – working hard to support the 50% that don’t pay taxes.

The federal tax code was never meant to tax “fairly” but has instead been used as an instrument for implementing   social policy and income redistribution.   Redistribution of wealth, necessary to some extent, has now reached a dangerous point when 50% of wage earners pay no taxes.  Those who are not taxed can chose to be wrongly  indifferent to the level of taxation or spending since it has no impact on them.  Politicians, of course, understand this situation and by promising more to the majority of voters who pay the least, keep themselves in office thus perpetuating trillions in deficit spending.   Those who pay the most have effectively been disenfranchised from the political process due to their small voting numbers.  At some point this untenable situation collapses of its own weight as the small number of people supporting the system are eventually taxed out of existence.

More On This Topic

More States Look To Raise Taxes

The Tax Capital Of The World

Hartford, CT Tea Party

Hartford, CT Tea Party

Craig Stahl, Connecticut, who participated in the Hartford, CT Tea Party had this comment for Comrade Obama:

“Remember the focus of the TEA Parties is not just taxes, but the massive
spending by all Governments (state & federal), and the sudden shift toward
socialism. That will result in massive debt for our grandchildren.”

Inflation, Deflation or World Depression?

calculatorShould We Discount The Consensus?

The debate on the outcome of bailouts and money printing continues.  A review of some of the current thoughts on Fed and Governmental action predict different possible outcomes – none of them particularly desirable.   When the consensus seems unanimous, maybe it’s time to discount the consensus?

The Marc Faber Interview by Peter Schiff

Marc Faber explains why bailouts and fiscal stimulus don’t work and are counterproductive to economic recovery.  Inflating our way out of the financial crisis is seen as the only option by the government.  Higher inflation  will be negative for both bonds and equities.

The Marginal Productivity of Debt

New money creation will only cause a further drop in price levels and cause a further contraction in the economy since the marginal productivity of debt has turned negative.  Bernanke’s flood of new money may cause something far worse than a depression.

Bailout Economics

Are we destroying capitalism by trying to save it?  The diversion of capital to failed enterprises is a recipe for disaster as money moves to the weaker hands.  What types of reform would foster an economic recovery?

Barack Obama as Herbert Hoover

How one small unanticipated event can trigger another depression.

Obama’s Auto Plan Gets Mixed Reviews

The administration’s first effort at ending the endless bailout cycle gets mixed reviews.  Sometimes you just can’t win.

US Mint Suspends Production of More Gold Coins

For those seeking the safety of gold coins, more bad news as the US Mint further restricts the production of gold coins.  Is the US Treasury seeking to limit the exchange of paper money into  hard assets?

Money Creation and The Fed

Does the explosive growth in the monetary base imply future uncontrollable inflation?

Bank Of England’s Desperate Last Tactic Forestalls British Sovereign Default

Printing Money – Final Desperate Tactic

The Bank of England is engaging in a massive repurchase of British debt in an attempt to pump cash into a crashing British economy.  The Bank of England’s money printing is necessary since Britain has run out of all other options – the vaults are empty and creditors will not buy her debt.

Never in history has a country printed money only for a short period of time; invariably it continues until the country’s currency is worthless and the economy in a state of total ruin.  Should the world economy improve and England maintains a functioning economy, her future would still be bleak.  The very fact that a nation needs to resort to printing money to stay afloat implies a crushing debt burden that is simply to large to ever pay back.  Printing money was the last resort option to sovereign default.  The larger question is what happens next, not only in Britain but throughout Europe.

In The Eurozone It’s A Total Catastrophe

Yes, it is dangerous for the Bank of England to buy up a third of all long-dated gilts. But it would be even more dangerous to allow deflation to run its course in an economy where debt levels have reached such extremes. Debt and deflation are a deadly mix.

We are now faced with the post-debt wreckage. The task at hand is to hold our societies together as best we can.

As it is we have seen industrial production collapse in every region. The drops in January were: Japan (-31pc), Korea (-26pc), Russia (-16pc), Brazil (-15pc), Italy (-14pc), Germany (-12pc). Falls that took two years from late 1929 have been compressed into five months.

Those who say this is nothing like the Great Depression are complacent. Household debt is higher today, and UK banks are in worse shape. (No bank of size failed in the British Empire during the slump). Britain’s economy contracted by 5.6pc from peak to trough in the early 1930s (Eichengreen). Some put the figure at nearer 8pc. We may surpass that this time.

America suffered worse. Real GDP fell 28pc. But the worst occurred in the second leg, after the heinous policy blunders of late 1931. Reading contemporary accounts, it is clear that hardly anybody – not even Keynes or Fisher – realised that the world was slipping into a depression during the first 18 months.

Nobel laureate Paul Krugman says the Fed has been as far behind the curve today as it was then, given the faster pace of collapse. It is bizarre that Ben Bernanke has not started to buy US Treasuries a full three months after he floated the idea, despite a yield rise of 80 basis points.

Given that Germany’s economy is imploding (Deutsche Bank sees 5pc contraction this year) one wonders if the Bundesbank would be less hawkish if the D-mark still existed. Even their hard-money brothers at Switzerland’s SNB are cash printers these days.

So has monetary policy in euroland been paralysed by squabbles at a calamitous moment, blighting every member state? Almost certainly.

Inflate or Default

The huge debt burdens of every sector of the economy and government are being compounded by the sharp reduction in world economic growth.  Debts that are too large to be repaid, will by definition, not be repaid.
The debt trap that the world finds itself in can be worked out by economic growth and the resulting increase in incomes to service the debt.  If economies continue to weaken, only two undesirable options remain – inflate the debt away (as Britain is attempting to do) or default.  Judging by the events in Europe, we are likely to discover just how undesirably these last two options can be.

AIG Says We Must Retain The Talented Staff That Lost $170 Billion

According to AIG, Good Work Must Be Rewarded

Record Loss

AIG, whose fourth-quarter loss was the worst in corporate history, earmarked $1 billion in retention pay for about 4,600 of the company’s 116,000 employees so they won’t leave the crippled insurer.

The company’s fourth-quarter loss of $61.7 billion was the biggest ever recorded for any U.S. company, and AIG considered seeking court protection before accepting the U.S. rescue in September.

Bonuses paid by companies receiving public funds have sparked outrage among lawmakers. New York Attorney General Andrew Cuomo is probing $3.6 billion in bonuses paid by Merrill Lynch & Co. shortly before it was acquired by Bank of America Corp. on Jan. 1.

AIG Faces Growing Wrath Over Payouts

Troubled insurer American International Group Inc., now 80% owned by U.S. taxpayers, spent the weekend deflecting mounting criticism of how government funds have been funneled to various banks and used to pay employee bonuses at the business unit that almost sank the company.

After calls for more transparency, AIG disclosed Sunday that roughly two-thirds of the $173.3 billion in federal aid it received has been paid out to trading partners such as banks and municipalities in the U.S. and abroad.

The disclosures came as AIG was lambasted for about $450 million in bonus payments planned for employees at a business unit that lost $40.5 billion last year. The unit’s woes pushed the company to near-collapse, forcing the government bailout.

Conclusion

The government’s bailout of AIG has been a disaster.   The bailout been a public relations nightmare and the cost to taxpayers is open ended.   A controlled liquidation of AIG would have been a more complex but better option.

How does AIG, which is now 80% owned by the US taxpayers, get away with this outrageous conduct?  Had there been no bailout, AIG would not have had the cash to make these ridiculous bonus payments.
What has the $170 billion (and counting) bailout of AIG accomplished?  We still have an organization that is losing huge amounts of money and is now using taxpayers money to pay ridiculous bonuses to the people who ran the company into the ground to begin with.

Let the free market work here.  Stop the government bailout of a failed company and let AIG go bankrupt as they should have.   Executives who have “contractual rights” to huge bonuses can get in line with other creditors in the bankruptcy court.  The taxpayers supporting this atrocity have been screwed enough already.