THE G WORD(S)
“And for all this, nature is never spent; There lives the dearest freshness deep down things; And though the last lights off the black West went Oh, morning, at the brown brink eastward, springs— Because the Holy Ghost over the bent World broods with warm breast and with ah! bright wings.”
God’s Grandeur, Gerard Manley Hopkins 1918
This AM we address the “G” word. We’ve done this before. In July 2008 then Treasury Secretary Henry Paulson used a late Sunday announcement (July 13th) to “Guarantee” Fannie
Mae and Freddie Mac debt (largely held by Chinese investors). The Paulson “Guarantee,” soon to be approved by Congress, amounted to a $300 billion backstop for each and
subsequently morphed into an unlimited Government takeover of the two SOE’si.
Was this Bush / Paulson gambit insanity?
More than other causes of the credit crisis, there were, in the early days, intense political pressures from Congress on Fannie and Freddie management to approve loans to everyone,
anyone, to justify the American ethic that everyone has a “right” to own a home. This came mostly from the liberals in Congress who still today, want to “redistribute” the wealth. But we
must say that the Bush Administration was complicit in this “how to keep America happy” policy. These were the good old days, the days of guarantees, gone forever.
Last week, the Obama Administration asked The Federal Housing Finance Agency, the current administrator (Edward De Marco) of Fannie and Freddie to forgive ii mortgage debt
on up to 500,000 borrowers potentially saving” up to $1 billion.
After months of study, Mr. Demarco turned down the request even after extreme pressure from the Obama Administration. So here we are, surely about to bail out homeowners eventually; after all, there is no risk in this economy. It’s just more developing Moral Hazard.
Ultimately as this deleveraging pressure grows it will be the taxpayer that foots the bill – make no mistake about that – that’s by far the easiest route for Congress and any sitting president,
whoever it may be at the time.
This scenario brings us to a much more important “G” word- Growth. Growth, the lack thereof or the criticality of growth today, to rescue us from the dilemma of “forced austerity,”
is on every politician’s mind.
The question of our times is: How to stimulate “growth?” After all we have now been 49 months without any growth since the July 2008. In that Sunday evening speech Treasury Secretary Paulson guaranteed that China’s Fannie and Freddie investments would be made good by the American taxpayer. In the interim there has been little or no real U.S. economic
growth. How did that guarantee work out?
The CBO suggests that without a resolution of the imminent fiscal cliff we will sink into another recession and it could be a doozy if we are forced into increasingly more massive debt
deleveraging. In 1933 Economist Irving Fisher called this potential a spiral of debt deflation and showed how the Great depression was a result.
We hope that both the polarized right and left in Washington will come together and kick the can down the road by December 31, 2012.
By the way, China is hedging her bets even with the American guarantee. She is buying gold with her U.S. dollars, bills and Notes as quickly as she can while reducing US dollar exposure
in her foreign exchange reserves. China imported 315 tons of Gold worth $6,128,000,000 from January 1, 2012 to May 12, 2012.
Last month Russia announced significant purchases of gold. There was news that Russia's central bank raised its gold reserves by 6.2 metric tons (6.8 tons) to 836.3 metric tons (921.9
tons) in June. Official-sector buying has underpinned gold's rallies in the last several years. So much for U.S. guarantees of our “paper.”
What’s so great about growth? Growth has been linked to:
1. increasing employment;
2. reducing the budget deficit; 3. allowing a reduction in taxes;
4. permitting an increase in benefits;
5. creating better business startup opportunities;
6. funding supply chain development, productivity, discovery and IP development.
At present the sole focus on the above list is on unemployment. Therein last week we saw an increase of U3 unemployment to 8.2% (once again 42 months) while the BLS U6
underemployment number representing underemployment stood at 15%. These are improvements over 1 year ago, to be sure, but at this rate of improvement we will have subpar
growth for 4 to 6 years. Gallup suggests underemployment consumes 17.1% of the working population.
Some country or countries somewhere have to lead the growth charge. Where will they come from?
We believe that the Federal Reserve is keeping its powder dry for one last charge at the elusive growth breastworks. At this stage it seems that the world’s Central banks have few tools to
confront the upcoming deleveraging cycle. If Washington chooses to deleverage (see discussion of July 31 Fannie gambit above) by forgiving debt then the US taxpayer will feel the hit – surely not a positive catalyst for consumer growth. If Washington cannot resolve its self-
imposed fiscal-cliff decisions then once again the economy, according to the CBO must shrink and our 6 desirable goals discussed above must all suffer.
There are positives to be sure. Real estate seems to be bottoming. Stocks believe in the Fed’s next QE program for September and also seem to believe that the Europeans will solve their
insolvency challenges. Perhaps more important the U.S. has at its disposal a partial solution to the issue of energy dependence on unfriendly foreign suppliers. Discoveries in all fields of
endeavour promise to increase productivity and stimulate growth while supporting an industrial renaissance in the U.S. All this is possible
What’s missing ?
It is leadership that recognizes the challenges and moves forward aggressively to restore our future. This is after all an election year, is it not?